Document of The World Bank
ReportNo: 20701 LV Public Disclosure Authorized
PROJECT APPRAISAL DOCUMENT
ONA
Public Disclosure Authorized PROPOSED LOAN
IN THE AMOUNT OF US$ 21.66 MILLION AND EUR 15.66 MILLION (US$14.5 MILLION EQUIVALENT)
TO
RIGAS SILTUMS
FOR A
Public Disclosure Authorized LATVIA
RIGA DISTRICT HEATING REHABILITATION PROJECT
June 30, 2000
Public Disclosure Authorized Energy Department Europe and Central Asia Regional Office CURRENCYEQUIVALENTS
(Exchange rate as of June 2000)
Currency Unit = Lat (Ls) US$ 1.00 = 0.59 Lat
BORROWER'SFISCAL YEAR
October 1 - September 30
ABBREVIATIONSAND ACRONYMS
CAS Country Assistance Strategy CFC Chlorofluorocarbon CHP Combined Heat and Power Plant DH District Heating ERB Energy Regulatory Board ERR. Economic Rate of Return FRR Financial Rate of Return FSU Former Soviet Union Gcal Giga calorie HOEI Heat-Only-Boiler ICB International Competitive Bidding IS International Shopping LIB Limited International Bidding LRMC Long-Run Marginal Cost NCB National Competitive Bidding NIB Nordic Investment Bank NPV Net Present Value NS National Shopping PMR Project Management Report VAT Value-Added Tax
Vice President: Mr. Johannes Linn Country Manager/Director: Mr. Basil Kavalsky Sector Manager: Mr. Henk Busz Tearn Leader: Ms. Carolyn Gochenour LATVIA Riga District Heating Rehabilitation Project
TABLE OF CONTENTS Page No.
A Project Development Objective ...... 2
1. Project DevelopmentObjective ...... 2 2. Key PerformanceIndicators ...... 2
B Strategic Context...... 2
1. Sector-RelatedCountry Assistance Strategy (CAS) Goal Supported by the Project...... 2 2. Main Sector Issues and Government Strategy ...... 2 3. Sector Issues to be Addressed by the Project and Strategic Choices...... 5
C Project Description Summary...... 7
1. Project Components...... 7 2. Key Policy and Institutional Reforms Supportedby the Project...... 8 3. Benefits and Target Population ...... I...... 9 4. Institutionaland Implementation Arrangements...... 9
D Project Rationale ...... 14
1. Project Altematives Considered and Reasons for Rejection...... 14 2. Major Related Projects Financed by the Bank and/or other Development Agencies...... 14 3. Lessons Learned and Reflected in the Project Design...... 14 4. Indications of Borrower Commitmentand Ownership...... 15 5. Value Added of Bank Support in this Project...... 16
E Summary Project Analyses...... 17
1. Economic...... 17 2. Financial...... 19 3. Technical...... 24 4. Institutional...... 24 5. Social...... 25 6. EnvironmentalAssessment ...... 26 7. ParticipatoryApproach ...... 27
F Sustainabilityand Risks...... 28
1. Sustainability...... 28 2. Critical Risks...... 28 3. Possible Controversial Aspects ...... 30 G Main Loan Conditions...... 31
1. EffectivenessConditions ...... 31 2. Agreements Reached During Negotiations.31 3. Condition of Disbursement...... 32
H Readiness for Implementation .32
I Compliance with Bank Policies .32
Annexes
Annex l Project Design Summary 33 Annex 2 Project Description 35 Annex 3 Estimated Project Costs 36 Annex 4 Cost-Benefit AnallysisSummary 37 Annex 5 Financial Summary for Rigas Siltums 46 Annex 6 Procurement and DisbursementArrangements 47 Table A Project Costs by Procurement Arrangements 50 Table Al Procurement Arrangements and Time Schedule 51 Table B Thresholds for ProcurementMethods and Prior Review 53 Table C Allocation of Loan Proceeds 54 Annex 7 Project Processing Schedule 55 Annex 8 Documents in the Project File 56 Annex 9 Social Assessment 57 Annex 10 Statement of Loans and Credits 89 Annex 1I Latvia at a Glance 90
Map IBRD 30632 Latvia Riga District Heating Rehabilitation Project Project AppraisalDocument
Europe and CentralAsia Region Date: June 30, 2000 Team Leader: Ms. CarolynGochenour Country Manager/Director:Mr. Basil G. Kavalsky Sector Manager: Mr. Henk Busz Project ID: LV-PE-8530 Sector: Energy Lending Instrument: SL Theme(s): Energy Efficiency Poverty Targeted Intervention: 1 ] Yes [X] No
Project FinancingData: [X] Loan [ ] Credit [ Grant [] Guarantee [ Other [Specifyl For Loans/Credits/Others: Amount: US$ 21.66 million and EUR 15.66 million (US$ 14.5 million equivalent) Proposed Terms: [ ] To be defined [ ] Multi-currency [ I Single currency StandardVariable [X] Fixed-spread, [ ] LIBOR-based US$ and EUR- denominated at the standard variable interest rate for US$ and EUR Grace period (years): 5 Years to maturity: 17 Commitment fee: 0.85% on undisbursed balances for first 4 years, standardcharge of 0.75% on undisbursed balances thereafter, beginning60 days after signing, less any waiver Front-end fee on Bank loan: 1.0% on principal amount, capitalized Financing Plan (US $m): [I Detailsto be defined Sources: Local Forein Total Rigas Siltums 43.8 6.7 50.5 Riga Municipality 2.7 2.5 5.2 World Bank 14.7 21.5 36.2 AB Svensk Exportkredit 26.6 26.6 Swedish Government Grant 2.1 2.1 Finnish Government and Other Grants 0.3 0.3 Commercial Banks' Loans 10.3 6.9 17.2 Total Cost + Front-end Fee 71.5 66.6 138.1 Borrower: Rigas Siltums Guarantor: Latvia Estimated Disbursements (Bank FY/US$M): FY 2001 2002 2003 2004 2005 Total Annual 2.2 9.1 13.0 8.8 3.0 36.2 Cumulative 2.2 11.3 24.4 33.1 36.2 Project ImplementationPeriod: CY 2000-2004 Expected EffectivenessDate: December 15, 2000 Expected Closing Date: June 30, 2005 Implementing Agency: Rigas Siltums Contact Person: Hugo Pavuls, Project Manager Address: Cesu Street 3, Riga, Latvia 1012 Tel: 371-7017240 Fax: 371-7 017 363 E-mail: [email protected] A: Project DevelopmentObjective 1. Project developmentobjective: (see Annex 1) The key development objective of the Riga District Heating (DH) RehabilitationProject is to optimize DH system operational performance, increase the efficiency of heat supply, distributionand consumption, improve the reliability of service delivery, enhance energy conservation and improve environmental conditions of Riga's district heating system through transmission and distribution network rehabilitation, substation modernization and new technologies, while promoting sound pricing policies and commercial practices to allow for the competitive development of Rigas Siltums and its possible eventual privatization. The project would also provide institutional support to Rigas Siltums.
2. Key performance indicators: (see Annex 1) The key performance indicators, as shown in Annex 1, include (a) share of heat utilized from CHP plants; (b) level of heat and hot water losses in the DH system; (c) bulk and retail heat tariffs; and (d) financial performance indicators of Rigas Siltums (e.g., debt service coverage ratio, current ratio, accounts receivables, profitability).
B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 17706-LV Date of latest CAS discussion: 04/ 21/98
The sector-related goal stated in the CAS is to help Latvia address municipal, environmental and public utility issues and contribute to enhancing capacity in these areas, specifically by supporting the adoption of sound pricing policies and utility practices and the commercialization and institutional development of DH companies. This is expected to pave the way for their eventual privatization and for attraction of private capital. Substantial interest has been expressed by the donor and financial community to provide co-financing in this area if the Bank;is involved in helping Latvia to set the policy framework, especially in the area of energy pricing, and build the institutions in the sector.
2. Main sector issues and Governrnentstrategy: Sector Issues
DH systems exist in all major Latvian cities and provide 70% of the national heat demand. DH systems provide most of the heat and hot water for urban dwellers as well as steam for industry, produced in combined-heat-and-power (CHP) plants or in heat-only-boiler (HOB) plants and transported through pipeline networks to block and/or individual substations and finally to buildings. In the capital city of Riga, DH is provided by Rigas Siltums, a joint-stock company owned 49.73% by Riga City Council, 49.72% by the state of Latvia administered by the Latvian Privatization Agency, 0.54% by Baltic Transit Bank and 0.0 1% by Latvenergo.
Since independence in 1991, maintenance of the DH systems has been underfunded, resulting in serious corrosion of fixed assets, especially pipelines, due to the deteriorating water quality. As a result, heat and hot water losses are high compared to Western systems. The lack of automation and heat metering at consumer connections in substations and, to some extent, at boiler plants results in additional wastage of heat energy. Latvian DH systems operate on constant flow and variable temperature conditions, rendering the dispatch of the heat load to plants having the lowest generation cost cumbersome. Introduction of a variable flow reg,ime through automated substations with consumption metered and controlled by consumers could reduce heat energy consumption by as much as 25% for the same service levels and considerably improve comffort.
2 In the largest Latvian cities, DH systems were designed to utilize mostly heat from the more efficient CHP plants rather than from HOBs. The CHP plants, in the present situation, are not owned by the same utility as the DH networks and are not utilized to their full potential. In Riga, for example, the national power companyLatvenergo owns the two CHP plants (TEC 1 and TEC 2) but is utilizing only 60% of the heat production capacity of one of its CHIPplants. This is mainly because heat demand has decreased since independence and the present DH system, based on constant flow regime, does not allow the increased dispatch of heat to CHLPplants without investmentsthat would allow a change in the DH system to variable flow regime. Also, increasing the utilization of the Riga CH-Pplants has not been an urgent need until recently, as imported electricity was available at a lower cost than electricity produced in the Riga CHP plants. This has led to higher bulk heat production costs to the DH companiesthan otherwise would be the case. In addition, in some cases outside Riga the CBP plants are privately-owned and exploit their natural monopoly situation and weak regulatorycapacities at the municipallevel by charging unreasonablyhigh heat tariffs to municipal DH companies.
Fuel prices of imported gas and mazut, which are utilized in heat production, have increased dramatically since 1991, now approximatingworld market levels, and have led to higher prices for essential services, especially heat. For example, in Riga the DH tariff (including VAT) is currently about US$31.221Gcal, which is very close to the average level of about US$33/Gcalin Finland.
DH tariffs are regulated by the Energy Regulatory Board (ERB), which can delegate this responsibility to local Governments. All local Government units have accepted the responsibility to regulate heat tariffs, except Riga where the City management prefers to leave this responsibility with the ERB. A draft Law on Multi-SectoralRegulation has passed two readings in the Parliament and the third and last reading is scheduled for September 2000. The current draft stipulates that regulation of tariffs for public services, including heating,provided at the municipal level is to be the responsibility of local Governments. In this case, the regulationof heat tariffs in Riga would become the responsibility of Riga City.
DH tariffs generally cover the costs of heat production and distribution, but because household incomes have not grown commensurately with the rise in DH prices, non-payment by customers has become a major problem for many heating utilities. Municipal govemments have introduced social assistance programs for vulnerable households, but generally these programs are not effective in providing an adequate level of support. In Riga, however, the experience differs from other cities in Latvia. Here, the DH enterprise has improved the collection of heat bills substantially since its creation in May 1996 and payment performancereaches approximately 100%today.
DH is facing increasing competition from other heating options, primarily decentralized gas-fired building boilers, particularly in areas where heat load densities are low. This situation has resulted partly from distortions in the pricing of co-generated heat as well as of gas, as today the benefits from co- generation are not shared with DH and household gas consumers are cross-subsidized by industrial gas consumers. Reducingthe price distortions in co-generated heat and in gas would have a major impact in favor of DH, since it would be the least-cost heating option in high-density populationareas.
Because of the large share of CHP electricity production in Latvia's power balance,the two CHP plants in Riga's DH system have a significant impact on Latvia's power sector, providing 20% of total power demand or 30% of domestic power production in 1999 (as compared to 24% of domestic production in 1998). The share of CHP electricity increases in years when water levels in the Daugava River are low, reducing power production from hydropower plants. Out of the national power balance of 6.0 Terawatt- hours (TWh) during 1999, power was supplied as follows:
3 Latvenergo: TWh Hydropower plants 46% 2.74 Riga CHP plants 20% 1.22 Independent producers 1% 0.08 Net imports from Estonia, Lithuania, Russia & Belarus 33% 1.96 Total 100% 6.00
The future role of Latvenergo's Riga CHP plants in electricity generation is directly related to the role of the CHP plants in heat production. Should demand for heat from these two CHP plants be lost if the DH system is significantly reduced in Riga because of the current price distortions, then Latvenergo's CHP plants would not be competitive in power-only mode and would be closed down. In this case, Latvia would become substantially more dependent on electricity imports and lose a huge sunk cost in DH assets. On the other hand, should the DH service remain viable in Riga and should it be rehabilitated in such a manner that DH load could be dispatched to Riga's ClP plants allowing for a greater utilization of heat from these plants, electricity production from these plants could be greatly increased, thereby reducing Latvia's dependence on electricity imports. Therefore, it is of the utmost importance to address the price distortions to ensure that the resulting system will be the least-cost, long-run option for both the provision of electricity and heat.
On February, 22 2000, the Govemnment of Latvia issued Decree No. 82, deciding to restructure Latvenergo into a holding company with separate daughter companies for hydropower generation, co- generation, electricity transmnission and distribution. Through this decree, the Government of Latvia has made a firm decision to: (i) separate power generation, transmission and distribution businesses presently operated by the vertically integrated company and to establish independent legal units; (ii) privatize 49% of the shares of both Riga CHP plants (TEC I and TEC 2) by applying international best practice methods; and (iii) evaluate different scenarios for privatization of the state-owned shares of Rigas Siltums. Through this process, the Government of Latvia aims to attract capital and management experience required for the development of the sector. For the fulfillment of these tasks, the Government has initiated an open international tendering procedure in order to hire an investment advisor/bank possessing international experience in similar power sector restructuring and privatization projects. The opening of the bids is scheduled for end-June 2000 with the aim to contract the potential advisor by end- July 2000.
Energy Sector Strategy
The Government's strategy for the energy sector is spelled out in the Latvian National Energy Program (NEP) up to the year 2020, approved in June 1997 by the Cabinet of Ministers. The key objective is to ensure safe energy supplies at the most competitive cost and with the lowest affordable environmental impacts. This objective is to be achieved by improving energy efficiency, advancing integration into European Union energy markets, liberalizing and restructuring the energy sector, creating an environment for private investments in the energy sector, introducing pricing policies based on economic costs and market principles, promoting utilization of domestic energy resources, decreasing dependence of Latvia on energy imports and supporting development of environmentally-friendly energy sources.
The NEP consists of 12 sub-prograrns including goals for the entire energy sector, including energy efficiency, thermal energy, electriciity, gas supply, other energy sources, environment protection, legislation, institutional regulation, education and science. The thermal energy sub-program gives emphasis to increasing energy production through the co-generation process and without cross-subsidies.
The NEP was followed by the State and Municipal Thermal Energy Policy which was approved by the Cabinet of Ministers in September 1997. The main objective of the State and Municipal Thermal Energy Policy is to ensure safe supplies of thermal energy to all groups of consumers at the lowest possible cost. 4 Since the existing DH systems represent enormous investments, the Government's strategy is to focus on rehabilitation of these systems where they are shown to be the least-cost heating option. Additionally, the Policy highlights the importance of the commercialization of the DH sub-sector for the long-run development of the heating industry and to allow for the attraction of private capital. Rehabilitation programs should emphasize increasing efficiency of their operation and reduction of environmentally harmful emissions. The Policy envisions increasing the share of thermal energy produced through co- generation and decentralizingheat supply in areas with low average heat load densities. DH systems are generally owned by municipalities and must take into account local conditions. Governmental institutions should create stable legislative and regulatory environments in order to motivate municipalities to reduce their direct involvement in the heating business and to attract the interest of financial institutionsand private investors.
The functions and rights of municipalities with regard to heat supply are specified in the Law on Local Governments and in the Energy Law. The Law on Local Governments, approved in May 1994, states that one of the permanent functions of municipalities is to organize a number of infrastructure services, including heat supply. The Energy Law, approved in September 1998, provided further elaboration of the municipalities' function "to organize" to include: (i) provide conditions for efficient operation of DH supply systems and fuel supply; (ii) plan for heat supply development in compliance with the admninistrativeterritorial development and environmental protection principles; (iii) define heat supply development taking into consideration possibilities for use of local energy resources and security of heat supply as well as long-term marginal costs, and approve such development plan together with the regulator; (iv) determine the preferable heat supply alternatives in different parts of the administrative territory; and (v) approve heat supply type in new constructions or expansions in compliance with the approved heat supply development concept. The Energy Law stipulates that energy consumerscan select only that heat supply alternative that is in accordance with the heat supply development prospects of the respective municipality.
Municipalities planning to undertake investments to rehabilitate their DH systems are required to elaborate municipal programs for the least-cost heating strategy. The Riga City Council accepted a "Concept for Thermal Energy Supply in Riga" in December 1997, which in principle recognizes that DH is the least-cost option for Riga associated also with the lowest cost and level of pollution and the highest safety and service quality. Preserving and improving the existing DH system in Riga is judged to be the preferred way to ensure essential heating services are provided throughout the city.
3. Sector issues to be addressed by the project and strategic choices: The proposed project aims at addressing the sector issues by supporting the implementationof investment programs and institutional reforms that: (a) address the backlog of maintenance in DH networks and consumer installations to improve energy efficiency in the DH system in Riga; (b) promote pricing reforms of bulk heat from CH-Pplants to allow for greater sharing of benefits from the co-generation process between heat and electricity, thereby improving the affordability of heat; and (c) support the continuation of DH in an area where it is shown to be the least-cost heating option. The project would also support the privatization of Latvenergo's DH production assets by requiring that a bulk heat purchase contract for heat by Rigas Siltums from CHP plants owned by Latvenergo be put in place, helping potential investors to determine the discounted cash flow value of these assets.
The project considered a number of strategic choices related to location and heat supply options, including various options for increasing the share of heat produced by CHP plants.
5 (a) Location. Latvia has decided to undertakethis second Bank-supportedDH project in the capital city of Riga where the DH enterprise is judged to have the financial strength to undertakean investment program and repay the loans. DaugavpilsMunicipality, the second largest city in Latvia, also considered participating in the project, but withdrew in early January 1999 because of the limited ability of the Municipality to providea guarantee for the repaymentof a loan, the limited borrowingcapacity of its DH enterprise, and its desire to proceed with investments utilizing its own funds and local loans. Other locations (e.g., Liepaja) were considered but not includeddue to their weaker financial situation.
(b) Heat SUPplyOptions. Riga has reviewed the alternatives of: (a) rehabilitatingthe DH system, including undertakingadditional investments(e.g., pipeline interconnection)to allow for a greater use of heat produced in Latvenergo's CHP plant; (b) abandoningthe DH service and introducing decentralized gas-fired mini-boilers in individual buildings; and (c) a combination of the two above. It has been decided to pursue the least-cost heat supply option based on rehabilitation of the DH system and an increased use of CBP production at Latvenergo's existing TEC 2 plant through a pipeline interconnection of the right and left banks of the DaugavaRiver. An increased share of heat produced from CHP plants would improve energy efficiency, reduce the bulk heat price and improve the affordability of the DH service to better ensure its long-run competitiveness with decentralized heating options. Additionally, increased use of the CHP plant for heat production would allow for increased domestic electricity production, reducingLatvia's need for electricity imports.
6 C: Project DescriptionSummary 1. Project components:(see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown) The district heating rehabilitation program would include: (a) supply and installation of automated consumer substations, and associated piping, for approximately 7,235 buildings without modem substations, to allow for heat utilization based on variable flow and heat supply from the most efficient and presently underutilizedTEC 2 CHP plant; (b) replacement and rehabilitation of selected corroded DH pipe sections to minimize heat and hot water losses and to increase the life of the DH system; (c) construction of a river-crossing pipeline, pumping station and other necessary network components, interconnectingthe right and left banks of the Daugava River to allow heat supply to the left bank from TEC 2; (d) various improvements at the Imanta heat-only boiler house, such as water treatment, burners, and a control system to allow the boiler house to be used as a peak load and reserve plant in the future; and (e) elimination of inefficient and polluting coal- and mazut-fired small boilers serving isolated networks by connectingthe respective areas to the DH system.
The optimizationof heat supply would facilitate increasingTEC 2's low-cost electricity generation from the present 1,200GWh/year to 1,900 GWh/year. This would allow for a larger amount of co-generation benefits to be allocated to the bulk heat sales, thereby allowing for a more competitive and affordable retail heat tariff. The automated consumer substations would also support reduction of the building heat consumption by approximately 20% due to more accurate temperature control.
The investmentsat Latvenergo's TEC 2 CHP plant which were considered necessary for the project (i.e., improvementsin water treatment and installation of circulation pumps speed control) have recently been implemented by Latvenergo utilizing its own funds. Latvenergo has also implemented other improvementsat TEC 2 in order to improve its overall efficiency.
The feasibility study identified certain areas in the Riga DH system where the heat load density is very low and does not justify continuation of DH as the least-cost option. The areas with low heat load densities compriseonly a small fraction of the heat demand in Riga (about 4% of heat demand in the main DH system). The decommissioningof DH in these areas has already started, and installation of individual gas-fired boilers for about one-half of the demand has already been completed. Decommissioningof DH in the remaining areas is expected to be completed as soon as possible and is not included in the project scope.
The program of institutionalsupport would include: (a) consultancy services for implementationsupport for Rigas Siltums in the areas of procurement, project financial reporting and disbursement; (b) consultancy services for Rigas Siltums to assist in the evaluation of the applicability of two-tier heat tariffs with fixed and variable components, with a particular emphasis on raising public awareness on the suitabilityof this tariff structure; (c) advisory services for Riga Municipality to improve the effectiveness of its social assistance program; and (d) consultancy services to evaluate ownership options of Rigas Siltums and to develop an action plan for the selected institutional set-up of Rigas Siltums.
7 Consumer Substations(7,235) Physical 66.5 48.3 _ _ _ _= Network Rehabilitation Physical 31.3 22.7 i_1.9 38.0 InterconnectionNetwork Physical 23.7 17.2 20.1 84.8 Daugava Pumping Station Physical 1.6 1.2 1.4 87.5 Production Plant Rehabilitation Physical 4.4 3.2 X __= _ Elimination of InefficientBoilers Physical 3.4 2.5 2.4 70.6 Design and Site Management Project 4.3 3.1 Nlanagement InstitutionalSupport: ImplementationSupport Project 1.6 1.2 Management Social Assistance Support Institution 0.1 0.1 Building Tariff Study Institution 0.5 0.4 Building Rigas Siltums Institutional Institution 0.2 0.1 Strategy Building Total Project Costs 137.6 100.0 35.8 26.0 Interest During Construction- Borrower 4.0 2.9 Financed_ Front-End Fee 0.4 0.3 0.4 100.0 Total Financing Required 142.0 103.2 36.2 25.5
2. Key policy and institutional reforms supported by the project: The key policy and institutional reforms concern the following:
(a) The pricing of bulk tariffs for heat from the CHP plant in a way that would distribute a greater share of the benefits of co-generation to heat, which would improve the affordability and competitiveness of the DH service;
(b) Evaluation of a two-tier tariff structure to ensure that proper signals are given to energy consumers, thereby encouraging energy conservation;
(c) Technical change in the operation mode of the DH system through investments that would allow for system optimization, including construction of a pipeline interconnection, and through renovation of consumer substations allowing for a greater share of lower-cost heat produced in CHP plants to be utilized in the DH system; and
(d) Facilitation of the valuation of Latvenergo's heat production plants for their planned privatization through a bulk heat supply contract to be negotiated with Rigas Siltums.
B 3. Benefits and target population: Benefits
The proposed project would have significant economic and environmental benefits for the consumers of DH in Riga and for the Latvian economy in general. These benefits are related to: (a) increases in Riga DH consumers' welfare from an improved service level, individual heat controls, elimination of overheating, and lower heat tariffs than otherwise would be possible; (b) resourcesavings from lower fuel consumption, lower operation and maintenancecosts, reduced heat and water losses, lower unit costs of electricity and heat supply (due to better use of existing capacity in CHP plants and less electricity imports; (c) reliability improvements from less interruptions in heat supply and more uniform supply temperatures; and (d) environmental improvements from less atmospheric emissions due to the lower usage of naturalgas and mazut in heat production and, on a global level, from the substitutionof imported electricity with electricity produced in the more environmentally-friendly CHP mode. In addition, additional employment would be generated from the design, assembling and installation of DH equipment.
Target Population
The project would benefit the Latvian population and specific social groups. The improvedservice levels would benefit primarily residential and public consumers, including a large number of low-income users, including pensioners, living in high-rise apartment buildings served by DH. The resource savings from the more efficient operation of the DH system and the lower bulk heat price would benefit Rigas Siltums, the largest DH utility in Latvia. The additional electricity generated in Latvia at a lower unit cost would allow Latvia to be less dependent on electricity imports, which would benefit the Latvian population in general. Government would gain from the increase in tax revenue on investment expenditures. The environmental improvements would benefit Riga's population. Labor would benefit from the increased job opportunitiesgenerated by the project during the design, construction and operationalperiods.
4. Institutionaland implementation arrangements:
Financing Plan It is proposed that the World Bank would provide a loan denominated in US$ 21.66 million and EUR 15.66 million (US$ 14.5 million). AB Svensk Exportkredit, as arranged by the Swedish International DevelopmentCo-operation Agency (Sida), would provide a loan in the amount of US$ 26.6 million, and commercial bank(s) would provide a loan(s) of US$ 17.2 million. The Swedish Government through Sida would contribute the majority or US$ 2.1 million of the US$ 2.4 million of grant funds required for the institutional support component, and the Finnish Government would contribute another US$ 0.2 million. Another US$ 50.5 million would be provided by Rigas Siltums out of its own internally generated funds. The loan amounts of the co-financiers were confirmed during negotiations. Submission of satisfactoryevidence that all conditions precedent to the effectiveness of the AB Svensk Exportkredit and commercial banks' loans have been fulfilled would be a condition for effectivenessof the World Bank Loan.
Riga Municipalityalso confirmed its intention to participate in the financing plan by providing US$ 5.2 million (or Ls 3 million) towards the cost of the substation equipment in key public buildings owned by the City. US$ 1.7 million of investments have already been undertaken during 1999, US$ 0.8 million has been allocated in the City's budget for 2000, and the balance of US$ 2.7 million is expected to be allocated in the City's budgets for 2001-02.
9 For the institutional support program included in the project, the cost of all components would be financed by grants from donors. Grant funding in the amount of US$ 2.3 million from donors was confirmed prior to negotiations of the World Bank Loan.
Lending Arrangements
The World Bank Loan would be provided directly to Rigas Siltums with a guarantee from Latvia (represented by the Ministry of Finance). The Ministry of Finance expressed an interest for the Loan to be made directly to Rigas Siltums with a sovereign guarantee. Rigas Siltums selected the fixed spread loan denominated in US$ and EUR, payable in 17 years, including a 5 year grace period, with a commitment-linked repayment schedule and level principal repayment, at the standard variable interest rate for US$ and EUR fixed spread loans. A front-end fee of 1% on the principal amount would be capitalized in the loan amount. A commitment charge of 0.85% per annum on the undisbursed balances for the first four years and the standard charge of 0.75% on undisbursed balances thereafter would be applied, beginning60 days after loan signing, less any waiver. The foreign exchange risk would be borne by Rigas Siltums. The Ministry of Finance would levy a charge for the guarantee of between 0.5-5.0%, depending on the risks and financial strength of Rigas Siltums. It has been assumed that the guarantee fee would be 0.5%, based on the current and likely future financial strength of Rigas Siltums. A guarantee contract would be entered into between Latvia and Rigas Siltums as a condition for effectiveness of the World Bank Loan.
After an initial request in 1997 from the Latvian Government to the Swedish Government's Baltic Sea Fund, Sida has been assigned to arrange a Credit for the purpose of assisting in financing the project. Sida, as Arranger, has appointed AB Svensk Exportkredit (the Lender) to administer and fund the Credit. A Credit Agreement would be entered into between the Arranger/Lender and Rigas Siltums (the Borrower) and the Government of Latvia (the Guarantor). The lending terms of the proposed Swedish Credit are expected to closely correspond to the World Bank loan terms. The main terms of the Swedish Credit include a maturity of 17 years, including a grace period of 5.5 years, and an interest rate of LIBOR plus a margin of 0.05% for US dollars or Swedish Crowns. A commitment fee of 0.25% per annum would apply to the undisbursed part of the Credit. The Borrower would also be required to pay the negotiations expenses. The foreign exchange risk of the Swedish Credit would be borne by Rigas Siltums.
The commercial banks' loan(s) would also be made directly to Rigas Siltums with a guarantee from Latvia. The lending terms of the proposed commercial banks' loans are expected to also correspond closely to the World Bank loan terms and would be in Lats. The commercial banks' loan would include a maturity of 10-15years, including a grace period of about 5 years, and an interestrate of RIGIBOR plus a margin of 2.0%.
Implementation
Rigas Siltums would be responsible for implementation of the project which would be carried out over the five-year period 2000-2004. Rigas Siltums has established a Project Management Organization (PMO), a separate unit within the company. The PMO includes sections for: (a) legal, (b) economics/accounting, (c) project development and (d) procurement. Rigas Siltums has already appointed a highly qualified Project Manager and a highly qualified Technical Manager, who would have primary responsibility for the technical aspects of the project. In addition, Rigas Siltuins' has appointed the Head of the Procurement Unit, Development Project Manager as well as the Project Economist and the Project Accountant who would manage the project's budgeting, accounting and financial reporting. Other technical, legal, commercial and financial personnel have also been retained with satisfactory qualifications. A Project Manual, including detailed job descriptions for the PMO, was also prepared prior to Loan negotiations.
10 International and local consultants would work together with Rigas Siltums' project management team during implementation. The foreign consultants would be employed to assist with procurement and disbursement and would provide in-house training to Rigas Siltums' procurement and financial personnel. The technical designs would be carried out partly by Rigas Siltums' Technical Department and partly by contracting out design work to local engineering firms. The foreign consultants would also be expected to assist in the technical design. Terms of reference for the foreign consultantshave been discussed and agreed, and the foreign consultant has been retained. During negotiations, agreementwas obtained that Rigas Siltums maintain until project completion a PMO with functions and responsibilitiesagreed with the Bank and ensure that the PMO at all times (i) is headed by an experienced Project Manager, (ii) has adequate staff, and (iii) is assisted by consultants,as needed,.all with qualifications,experience and terms of reference satisfactoryto the Bank.
Procurement
The World Bank would finance the replacement of corroded DH network, construction of a pipeline interconnection of the right and left bank networks of the DH system, a pumping station, supply of insulation materials and fittings for the networks, and the elimination of inefficient boilers for an estimated total cost of US$ 35.8 million. AB Svensk Exportkredit would finance DH substations for an estimated total cost of US$ 26.6 rmillion,and the Swedish Government, through its aid agency Sida, would fund consultants'services to assist Rigas Siltums in project implementationand for undertaking a heat tariff study in an amount of about US$ 2.1 million. The Finnish Government is expected to fund the consultants' services related to the institutional study of Rigas Siltums in the amount of about US$ 0.2 million. The commercial bank(s) would finance additional DH substations and related works and rehabilitation of secondarynetworks and productionplant for an estimated total cost of US$ 17.2 million. Riga City would finance 300 large district heating substations for key public buildings (such as schools and hospitals) for an estimated total cost of $5.2 rmillion. Rigas Siltums has already, during 1999, financed DH substations, rehabilitation of primary and secondary networks and elimination of some inefficientboilers in the amount of US$ 8.4 million and would finance procurementof various additional DH equipment and materials for networks, installation of substations, boiler house rehabilitation, as well as taxes on the amounts of the components financed by the foreign financiers (US$ 19.8 million) for an estimated total cost of US$ 42.1 million.
The project procurement elements, their estimated costs and bidding methods, procurement plan providing packaging, and estimated schedule of the major procurement actions are summarizedin Annex 6, Table Al. All other procurement information, including (a) date of General Procurement Notice publication; (b) Bank procurement review process; and (c) implementingagency's procurement capacity assessment as well as required training are summarized in Annex 6, Table B. World Bank-financedprocurement would be carried out in accordance with the World Bank's Guidelines for Procurement(published in January 1995, revised in January and August 1996, September 1997 and January 1999). All World Bank-financed procurement would follow international competitive bidding (ICB) procedures, except that up to 2% of procurement could be in accordance with international shopping proceduresacceptable to the World Bank.
The AB Svensk Exportkredit, commercial banks, Riga City and Rigas Siltums' financed procurement would be carried out in accordance with their respective applicable procurementpolicies and procedures. The procurementarrangements under the co-financing arrangements,while under the responsibility of the borrower and the co-financiers, were reviewedand found acceptable to the World Bank.
Receipt by the concerned financiers of the technical specifications and draft bidding documents for the first year's investmentprogram was a condition for negotiations of the World Bank Loan.
11 Disbursement
Rigas Siltums has expressed a preierence for disbursement of the World Bank Loan to be based on submission of quarterly Project Management Reports (PMRs) and channeled through a Special Account in a commercial bank acceptable to the World Bank. The Ministry of Finance confirmed that a Special Account for this purpose would be established in the name of Rigas Siltums. Based on the quarterly PMR, the World Bank would advance funds into the Special Account for the amount required for the upcoming period. The review of the financial management and intermalcontrol procedures indicate that Rigas Siltums would be eligible for PMR-based disbursement. The Riga District Heating Rehabilitation Project would be the first project in Latvia to utilize this arrangement.
Rigas Siltums has been informed of the rules for the processing of PMR-disbursements,as well as of the Bank's requirements for supporting documentation to be presented in the quarterly PMR. Rigas Siltums has also been informed that the expenditures reported in the PMRs would be reviewed by the auditor. The arrangementsfor establishing and operating the Special Account were confirmedduring negotiations.
Proceeds of the World Bank Loan would be allocated in accordance with Table C, Annex 6. During negotiations, agreement was obtaineclregarding the disbursement arrangementsand the establishment and operation of the Special Account.
The AB Svensk Exportkredit loan would be disbursed mainly through direct payments to suppliers and contractors and also by directly reimbursing Rigas Siltums for payments made for eligible expenditures. The disbursement arrangements for the AB Svensk Exportkredit loan were discussed and agreed during negotiations of the AB Svensk Exportkredit loan.
Financial Management System
Rigas Siltum's present financial management system is of high standard and is now judged to have the capacity for project management reporting after some minor adjustments were made. The Bank's financial management specialist found that the system's strengths are: (a) an advanced and flexible accounting system (SAP R/3); (b) a budget system that allows for regular monitoring of cost centers and actual financial performance through comparison with budget and targets; (c) a well-designed internal control system; (d) competent and committed staff and good personnel management; and (e) sound auditing arrangements. The financial management and internal control procedures are guided by a Financial Management Manual, which was prepared by an international consultant and is acceptable to the Bank. The manual provides flow charts with detailed process and activity descriptions of all organization units, chart of accounts and cost centers. Furthermore, it includes detailed job descriptions for each staff position.
Accounting and Internal Control
In order to provide accurate and timely information on project sources and uses of funds, Rigas Siltums would prepare Project Financial Statements. It has been agreed that the project accounting would be integrated into Rigas Siltum's existingyaccounting in the SAP system. The quarterly Project Management Reports would be compiled using input from the various concerned departments in the existing organization. To enhance the capabiliityof existing systems and procedures: (a) the Treasury Module for SAP R13 was activated and an interface with the system was created to allow for automatic project reporting; (b) procedures and routines for project accounting were documented in flow charts and job descriptions in the relevant sections olfthe financial and project manuals; and (c) all source documents for project accountingwould be stored in fire-resistantcabinets.
12 Auditing Arrangements
Rigas Siltums' financial statements (income statement, balance sheet and cash flow statement) would be prepared in accordance with International Accounting Standards, while the Project Financial Statements would be prepared in accordance with the format provided by the Bank. Both the company and project statements would be audited by an independentauditor acceptable to the Bank, and the audit report would be submitted to the Bank within six months of the end of the fiscal year. The audit report of the Project Financial Statements would also contain a separate opinion on the operation of the Special Account. Arthur Andersen audited the 1997, 1998 and 1999 financial statements of Rigas Siltums. This arrangement would be acceptable to the Bank. The auditor would be expected to be appointed or reconfirmed three months before the end of the fiscal year. During negotiations,agreement was obtained regarding the accountingand auditing requirementsof the project.
Supervision, Monitoring and Reporting
The assessment carried out by the Bank shows that Rigas Siltums is a well-managedcompany, capable of implementing the proposed project with the support of foreign and local consultants. As this is a large project with several co-financiers, a significant supervision effort would be required particularly during the first two years when procurement and disbursementpractices and coordination systems with the co- financiers would be established. It is expected that about 15 staff-weeks of effort each year for the first two years and about 12 staff-weeks each year thereafter would be required for supervisionby the Bank.
Quarterly Project Management Reports (PMRs) would be submitted to the Bank within 45 days of the end of each quarter. These reports would form the basis for advancing funds to the Special Account and would also be used for project management purposes for tracking project progress, procurement and disbursement. The following areas would be covered by the PMR: (a) Financial Report - project sources and uses of funds, uses of funds by project activity, project balance sheet, project cash withdrawals, Special Account statement, project cash forecast; (b) Project Progress Report - output monitoring reports for contract managementand unit of output by project activity; and (c) Procurement Management Report - procurement process monitoring for goods, works and consultants' services, contract expenditure reports for goods and works and consultants' services. A thorough presentation of the PMR requirements has been provided to Rigas Siltums staff. The Bank has developed a set of PMR forms specifically tailored to the proposed project, and the adjusted PMR forms have been provided to Rigas Siltums and the co-financiers,which have agreed to the format for project reporting.
The Bank would carry out a mid-term review of the project not later than December 31, 2002. In addition to the topics covered under the Project Management Reports, the mid-term review would include an in- depth review of the economic viability of the project components, based on actual costs and benefits achieved to-date, and of the overall institutional and financial viability of Rigas Siltums. Based on the outcome of the mid-term review, measures would be taken to ensure the efficient completion of the project. The timing of the mid-term review was agreed during negotiations.
An Implementation Completion Report (ICR) would be prepared by the Bank with inputs from Rigas Siltums not later than six months after completion of the project. The ICR would evaluate how well the objectives of the project have been met, the overall performance of the project, the performanceof Rigas Siltums and lessons learned. During negotiations, agreement was obtained regarding the reporting and monitoring requirementsof the project.
13 D: Project Rationale 1. Project alternatives considered and reasons for rejection: As stated previously, the project design considered the alternatives of (a) rehabilitating the DH system, including undertaking additional investments (e.g., pipeline interconnection) to allow for a greater use of heat produced in Latvenergo's CHP plant; (b) abandoning the DH service and introducing decentralized gas-fired mini-boilers in individual buildings; and (c) a combination of the two. The alternative of rehabilitating the DH system with the additional investments to allow for a greater use of heat produced in Latvenergo's CHP plant was shown to be the least-cost long-run option for the following reasons: (a) an increased share of heat produced from CHP plants would improve energy efficiency, reduce the bulk heat price and improve the affordability of the DH service to better ensure its long-run competitiveness with decentralized heating options; (b) retail gas prices for small consumers, which are today cross-subsidized by large consumers, would be expected to increase in the future to about two times today's gas price for large consumers when the costs of gas distribution would be properly recovered in the tariffs, and this would further improve the competitiveness of DH as compared to the option of gas-fired mini-boilers in buildings; and (c) increased use of the C-P plant for heat production would allow for increased domestic electricity production at a lower cost, thereby reducing Latvia's need for electricity imports.
2. Major related projects financed by the Bank and/or other development agencies: (completed, ongoing and planned)
SX to i'582 Pi'ec Laes Supervision (Form,590)
Implementation Development Progress (IP) Objective (DO) Bank-financed Heat production capacity and Ukraine Kiev District S S efficiency of heat supply in Kiev, Heating Improvement Ukraine Project (FY98) Efficiency of heat supply in Jelgava, Latvia Jelgava District S S Latvia Heating Rehabilitation Proect Efficiency of heat supply in Estonian Estonia District Heating S S district heating systems Rehabilitation Project Otherdevelopment aeencies Efficiency of power supply in Latvian EBRD Hydropower hydropower plants Rehabilitation Project IP/DO Ratings: HS (Highly Sat:isfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)
3. Lessons learned and reflected in the project design: The proposed loan represents the second Bank investment loan to Latvia for the DH sector, the first one being the Jelgava District Heating Rehabilitation Project (effective 1995). In addition to Latvia, the Bank has implementeddistrict heating rehabilitation projects in Poland, China and Estonia, all on-going, and in Bosnia, completed. This project would draw more heavily on the experience of Jelgava District Heating Rehabilitation Project and Estonia District Heating Rehabilitation Project. Both of these projects are nearly complete, and data is availablle on the costs and performance of different kinds of rehabilitation concepts. Both projects demonstrate that the rehabilitation concepts similar to those proposed in this project are cost effective.
14 Some of the lessons learned to-date include: (a) strong project ownership and advance preparation of project components is necessary for timely implementation; (b) decentralized project management arrangements work far better than centralized arrangements; (c) the relationship between prices and incomes change rapidly in countries in transition and the heating service, which now appears expensive, should become easier to afford in a relatively short period of time; (d) there is the possibility to redress the financial difficulties of DH companies during project preparation through tariff increases and settlements of arrears by major debtors, including households; and (e) strong support from municipalities is needed to resolve collections and payment issues. These lessons were taken into account, as appropriate, during the preparation of the proposed project.
4. Indications of borrower commitment and ownership: The preparation process of the project has generated a keen interest by a large number of energy sector and Government agencies and stakeholders. This process has initiated significant discussion on the key issues and has helped the concerned parties to begin to find solutions. A clear consensus has emerged that it is in Latvia's best interest to keep co-generated district heating and power alive in Riga as the least- cost long-run option for heat and power supply.
Borrower commitment and ownership have further been demonstrated by the following:
(a) Official request from the Ministry of Finance to the World Bank and the Swedish Government's Baltic Sea Fund (Spring 1997) to assist Latvia to start preparation of a district heating project in Riga;
(b) Establishment of a Steering Committee for the Riga DH project, consisting of all involved parties including: Rigas Siltums, Riga Municipality, Latvenergo, Latvian Privatization Agency, Ministry of Economy, Energy Regulatory Board and the Swedish Government's Aid Agency, Sida.;
(c) Public Relations campaign about the project design prepared by Rigas Siltums and carried out during January 1999, geared towards raising the awareness of a number of concerned parties and the general public;
(d) Inclusion of the project in the Public Investment Program of the Government for the Year 2000;
(e) Pricing reforms already being implemented for Latvenergo's bulk heat tariff from TEC 2 to allow for a more equitable sharing of the benefits from co-generation to heat. The bulk heat tariff has been retained at the same level for the last three years, and Latvenergo is committed to sharing a larger part of the co-generation benefits to heat production when larger quantities of heat would be sold as a result of the project investments,thereby helping to maintain the competitiveness of district heating supply;
(f) Latvijas Gaze has expressed its intention to work to support DH through more appropriate gas pricing policies reflecting the actual costs of gas supply to households (instead of today's cross- subsidized policies that favor building boilers over centralized sources). There is now also an understanding that only because of the existence of DH in Riga can Latvijas Gaze sell gas for electricity generation in Latvia. This also allows for a better bargaining position with Gazprom; and
(g) Rigas Siltums is considering introducing a two-tier tariff structure, with a capacity (fixed) and an energy (variable) charge. Consulting services for the evaluating the suitability of such a tariff would be supported under the proposed project.
15 5. Value added of Bank support in this project: The Bank's involvement is regarded as important in supporting the development of Latvia's priority energy sector investment programs under the present conditions of severe resource constraints and in supporting the development of institutions involved in the delivery of energy services. The Bank is well positioned to respond to the opportunityand challenges posed in Latvia today by: (a) applying its global experience in the heating sector to help Latvia develop appropriate pricing policies,especially in the areas of bulk heat pricing from co-generators and gas pricing, and to establish a clear and independent regulatory framework to help reduce the barriers to private sector investment; (b) assisting Latvia in identifying investments that would allow for the optimization of combined-heat-and-powersystems; (c) assisting Latvia to determine the vallueof Latvenergo's heat production assets for eventual privatization by providing realistic estimates of the future heat energy market in Riga; (d) providing capital to support the much-neededheating sector investmentsuntil the sector is able to attract a sufficient volume of capital from other sources;and (e) helping Latvia to mobilize co-financing from other internationaland domestic financial institutions and donor organizationsby taking the lead in helping Latvia to set the overall policy frameworkand build the institutions in the sector.
16 E: Summary Project Analysis 1. Econornic(supported by Annex 4): [XI Cost-BenefitAnalysis: NPV=US$ 24.8 million and ERR= 16.1% with a 65.3% certainty; NPV= US$ 15.7 million, and ERR= 13.0% with a 75% certainty [X] Cost-EffectivenessAnalysis: NPV of Costs =$ -30.1 million for the project,while $ -62.5 million for the alternativewith individual boilers [X] Other: Distributive analyses: With a 75% certainty, 33% of the net benefits would go to the poor, while 22.2% would go to the Governmentin the form of added fiscal revenue.
EconomicAppraisal
The project would have significant economic benefits. First, the project would avoid an energy deficit, providing benefits to consumers in the form of lower prices and higher reliabilityof DH supply relative to the alternatives. Second, the project would also reduce operational costs and losses of the existing DH system. Third, consumers would be able to regulate their heat consumption due to the reconstruction of substations, leadingto energy conservationand resource savings.
A least-cost analysis was undertaken to evaluate the costs and benefits of the proposed rehabilitation option as comparedwith the option of decentralizingheat supply through the installationof individual gas boilers. The analysis is based on the economic costs net of financial and fiscal transfers, such as taxes and interest payments. Costs have been compared "with" and "without the project" for the same level of heat demand. Investment, operation and maintenancecosts, fuel and auxiliary electricity costs have been included in the analysis, and as a benefit the supply cost savings from energy conservation have been included. The least-cost analysis has been performed in constant 1999 US$. The least-cost analysis shows that the project is nearly US$ 32 million less expensive than the alternative. The table below presents the discounted cost components consideredin the least-cost analysis.
Least-Cost Analysis: DH Project vs. Individual Boilers US$ thousand of 1999 Alternatives PVs @10% Project Scenario 30,091 Rehabilitation cost 77,790 Operation & maintenancewith the project -2,675 Incremental fuel cost with the project 8,938 Incremental auxiliaryelectricity cost 409 Energy conservation savings -53,371
Individual Boilers 62,505 Investment in individual boilers 32,004 Operation & maintenance with individual boilers 7,310 Fuel costs of individual boilers 23,191
An economic cost-benefit analysis was also undertaken and considers the cost and benefit flows net of financial and fiscal transfers. All costs and benefits are valued at 1999 border prices and are incremental in nature, valued as the difference between the system costs/benefits "with" and "without the project." The costs and benefits are considered over a 20-year economic life of the investments. The main cost components include investment costs, operation and maintenance costs and fuel costs. The main benefit components include the increase in willingness to pay, loss savings, reduction in operation and maintenance costs, energy conservation and reliability improvements. Further non-quantifiable benefits would result from lower air pollution levels in areas where the boilers are located. These environmental benefits would result from reduced emissions of SO2, NO,. CO2 and dust due to lower fuel consumption 17 (and for some plants, due to improved combustioncontrol). The project is economicallyattractive with a net present value (NPV) of US$ 24.8 million and an econornic rate of return (ERR) of 16.1% with a 65.3% certainty; and NPV of US$ 15.7 million and ERR of 13.0% with a 75% certainty.
Economic Cost Benefit Analysis US $ thousand of 1999 PVs @10% Economic Costs 87,645 Investment 77,790 Operation and maintenance 917 System fuel costs 8,938
Economic Benefits 112,402 Willingness to pay 36,429 Loss savings 3,968 Heat conservation 54,371 Reliability irnprovement 14,043 Operation and maintenancesavings 3,592
Net EconomricBenefit 24,758 ERR 16.1%
The table above presents the distribution of the economic costs and benefits of the project. Among the costs, investmentexpenditures are the most significant, while among the benefits, the heat conservation (made possible from customers regulaLtionof indoor temperatures) is the most important benefit.
Risk and Sensitivity Analysis
Projects in Latvia face a considerable degree of risk. Part of the risk is associated with the macroeconomicand political uncertaintiesfacing all transition economies. Anotherpart is specific to the project and these uncertainties are considered in the risk analysis. Risk analysis covers a number of possible uncertainties related to project delays, cost increases, lower avoided demand deficit, lower efficiencies, losses and operation and maintenancesavings with the project, higher and lower tariffs and fuel prices, and lower reliability improvements. It estimates the likelihood that the project risks would have an adverse effect on the economic indicatorsof the project. The risk analysis shows that the project has a probability of 65.3% of achieving the estimated outcomes (NPV = $24.8 million and ERR = 16.1%). The probability of achieving an uneconomicrate of return below the 10% opportunity cost of capital for Latvia is less than 8%.
A sensitivity analysis has also been undertaken to test the robustness of the ERR of the project to changes in its key cost and benefit components, such as investment costs, fuel costs, willingness to pay, loss reduction, energy savings due to the iinstallationof substations, and operation and maintenance savings, all of which are subject to risk and uncertainty. The analysis shows that the proposed investments are attractive and robust, as only with significant increases in costs or large decreases in benefits would the ERR fall to levels below the opportunity cost of capital of about 10%. For example, more than a 30% increase in investmentcosts or more than a 250% increase in natural gas prices would be required for the ERR to fall below 10%. Also, willingness to pay benefits would need to decrease by more than 68% or energy conservationbenefits would need to decline by more than 45% before the ERR would fall below 10%. The project's economic indicators are not particularly sensitive to changes in operation and maintenance costs, loss reduction and other savings, or reliability benefits. The results of the sensitivity analysis are shown in the figure bellow. The point where all the cost and benefit curves intersect corresponds to the ERR of 16.1%. The basis and assumptions for the analysisare presented in Annex 4.
18 Project SensitivityCurve - Investment 1000/a -in- SystemCosts
&> - 7%- * >>;- -*- - *-- *Willingness - -0 * -1}&to ; pay - - if ------s 50%- . . ------Loss reduction+ other savings ~ 25%-...... ----...... Heatconservation --o ReliabilityImprovement 0%
'o -25% ------
0 -50% ------< ; ...... O -75%-...... I ... -100% I I I I 0% 5% 10% 15% 20% 25% 30% 35% EconomicRates of Return
Distributive Analysis
A distributive analysis was undertaken to determnine how the cost and benefits would be allocated among the different project stakeholders, specifically the poor and the Government. The poor (37% of the population in the lowest two quintiles) will benefit from three main sources: (a) employment opportunities during installation and operation of the project would benefit poor unskilled workers who would receive a net increase in their incomes of at least 10%. given the prevailing unemployment conditions; (b) additional opportunities for lower-income groups would result from the increase in demand for goods and services by domestic suppliers and manufacturers of DH equipment; and (c) gains to lower-income groups from an increase in consumer surplus, heat conservation and reliability improvements. The latter benefit exists because poor households cannot compensate for a shortage in heating services (as better-off users can) and therefore experience significant personal costs, such as sickness, when heat energy shortages occur.
The Government also benefits from a variety of taxes. The analysis shows that if a cost recovery tariff policy is maintained, the Government would benefit from the project through a variety of taxes, such as the 28% social tax on labor expenditures in investment and operations and maintenance expenditures, the 9% paid by labor, VAT on project expenditures, and a 25% profit tax on Rigas Siltums' net income.
The distributive analysis shows that at least 49.5% of the net benefits would help the poor, with a 35.2% certainty, and about 25.2% of the benefits would go to the Government, with a 62.2% certainty.
2. Financial: Project Financial Analysis (supported by Annex 4):
[X] FNPV=US$ 5.5 million and FRR= 11.1% with a 58.2% certainty.
The project will generate significant financial benefits for Rigas Siltums from the efficiency savings on existing DH facilities and the reduction in the bulk heat tariff for heat purchases from Latvenergo. The financial analysis has been conducted in constant 1999 prices based on the net (after tax) cash flows generated by the project during its 20-year life. The analysis shows that the financial rate of return (FRR) would be attractive at 1 1.1%, which is above the 10% cost of capital for Latvia. This real FRR would be equivalent to a nominal rate of return of 15.5%, which is deemed acceptable. With a 75% certainty, the FNPV of the project is certain to cover costs, breaking even and yielding at least a FRR of 10.0%, equivalent to a nominal rate of return of 14.4%. both of which are considered robust and satisfactory. The investment project is judged to be financially robust, with a less than 25% probability of having a negative FRR. 19 Financial Cost-BenefitAnalysis US $ thousand of 1999 PVs @10% Financial Costs 105,186 Investment 95,331 Operation and Maintenance 917 System Fuel Costs 8,938
Financial B3enefits 110,691 Sales Revenue 33,350 Reduction in Bulk Heat Purchase Price 12,801 Loss Savin!gs 61,931 Unserved Energy 2,610
Net Financial Benefit 5,505 FRR 11.1%
Rigas Siltums' Financial Assessment (supportedby Annex 5):
Past FinancialPerformance
Rigas Siltums was established and incorporatedas a joint-stock company in May 1996 by consolidating six enterprises previously involved in heat supply in Riga. The company is engaged in the production, distribution and sale of heat energy to residential, public and industrial consumers. Since the creation of the enterprise, a stable financial position has been maintained, with profits on operations each year (financial year is October 1-September30). Rigas Siltums' total revenues in 1998/99were about US$111 million. Fuel, energy and salaries account for approximately 80% of Rigas Siltum's operating expenses. The company has established a strong customer base, after having disconnectedthe non-payingcustomers during 1997/98. The collection performance is excellent reaching close to 100% in 1998/99, resulting in low levels of accounts receivable (less than 30 days of annual billings). As a result of strong revenue collection, Riga Siltums is able to pay its suppliers and contractors within a reasonable time, including a debt obligation to Latvenergo relateidto accounts receivables of consumers prior to the establishment of Rigas Siltums. A key factor behind the solid performance at Riga Siltums is the strong management team and the implementationof the SAP R/3 system. This system is enabling the managementto make day-to- day decisions based on up-to-date and reliable information regarding its operational and financial position.
Heat Tariffs
Today, heat tariffs in Riga are quite high (on average, Ls 18.11/Gcal including VAT or about US$31.22/Gcal). They are only slightly below the level of heat tariffs in Helsinki and cannot be raised significantly without risk of losing D'H consumers. Latvenergo has not increasedthe bulk heat tariff from TEC 2 this year, so the retail heat tariffs to be charged by Rigas Siltums for the next heating season will remain at the same level as the last two heating seasons. One of the key objectives of the proposed project is to ensure that heat tariffs remain competitive with alternative heating options and do not increase significantly in the near term. This would be possible if TEC 2 can be utilized to a greater extent as a result of the project investments. Latvenergo is committed to lowering the bulk heat tariff in the future for larger volumes of bulk heat sales.
A new tariff methodology was introduced in May 1998. Key features of the newly introduced tariff regime is that a uniform tariff is levied on residential, industrial and public sector consumers, and tariffs 20 are allowed to be set to cover total costs, including reserves for investments beyond the annual provision for depreciation, if necessary. The tariff is calculated every year in advance of the next heating season and has to be approved by the Energy Regulatory Board (ERB). According to the methodology, the tariff could be approved for a 1-year or a 3-year period. Rigas Siltums has applied for approval of a retail heat tariff of Ls 18.11/Gcal (including VAT) or Ls 15.93/Gcal (excluding VAT) for the upcoming 3-year period. This tariff is the same as in the previous several years and is expected to enable Rigas Siltums to remain competitive with other heating options.
Rigas Siltums is giving consideration to a two-tier tariff, with a capacity (fixed) charge and an energy (variable) charge. The benefit of this tariff structure is that it would allow the company to charge consumers for the cost of actual heat delivered rather than the cost of heat delivery estimated at the beginning of the heating season. This would allow the company to recover its actual costs while providing better signals to consumers leading to more efficient heat use and energy conservation. The management of Rigas Siltums indicated that a two-tier tariff would require substantialawareness raising to customers to ensure their full understanding of the proposed tariff approach. To this end, it was agreed that support in the form of consultancy services would be included under the project to assist in the evaluation of the applicability of two-tier heat tariffs with fixed and variable components, with a particular emphasis on raising public awareness on the suitability of this tariff structure in the Latvian environment. Agreement was obtained during negotiations that Rigas Siltums would undertake a study, under terms of reference and by consultants satisfactory to the Bank, not later than June 30, 2001 to evaluate the applicability of two-tier heat tariffs, with a particular emphasis on raising public awareness.
Future FinancialPerformance
Bulk Heat Tariff. The future bulk heat tariff to be negotiated with Latvenergo, which considers the purchase of additional heat from TEC 2 made possible by the proposed project, would have a significant impact on the future financial performance of Rigas Siltums. During appraisal, an analysis was undertaken to determine the maximum bulk heat tariff under which Rigas Siltums can remain financially viable, undertake the project and maintain competitive retail tariffs. The analysis showed that the average bulk heat tariff from Latvenergo would have to be reduced in the year 2003/04 to Ls 8.29/Gcal (Ls7.1/MWh) from about Ls 9.05/Gcal (Ls 7.8/MWh) today. Today's bulk heat purchases of 2,100,000 Gcal would, as a result of the project, grow to 3,200,000 Gcal.
A separate analysis, based on cost data provided by Latvenergo for its heat production plants and using the proposed formula for calculating the bulk heat tariff, showed that the proposed maximum average bulk heat tariff that Rigas Siltums could bear was likely to allow for full cost recovery of Latvenergo's plants and provide some contribution to capital reserves for future investments.
Since a contract for the supply of bulk heat from Latvenergo's TEC-2 CHP and other plants to Rigas Siltums' DH network is important for ensuring the viability of the river crossing pipeline and associated investments but has only a limited impact on the viability of the other project components. a contract, satisfactory to the Bank, on cooperation in efficient use and realization of heat energy generated by the CHP plants under the Project would be a condition for disbursement against the river crossing pipeline and associated investments. The contract would include a formula and other conditions which would determine bulk heat tariffs that would ensure the financial viability of these project components. Draft contract conditions are currently being elaborated. The key element is the price formula, which is expected to link the price of bulk heat to factors such as quantity of heat sold, inflation, imported electricity price, fuel prices, etc. The general principles that would be applied for future cooperation between Rigas Siltums and Latvenergo would be included in a Memorandum of Understanding to be entered into by Rigas Siltums and Latvenergo as a condition of effectiveness of the Bank Loan.
Substation Arrangements. Another factor that will have a significant impact on the future financial performance of Rigas Siltums concerns the ownership and cost recovery arrangements for the substation 21 investments, which account for about 45% of total project cost. In Riga, DH substations are owned by the building owners, and it is the building owner's responsibility to maintain and replace the substation when the need arises. At present, about 70% of buildings in Riga are owned by Riga City, which are expected to be privatized in the near future, and the remaining 30% are owned by cooperatives and others. Under the proposed project, new substations with modem control equipment are necessary to allow for increased heat production from the TEC 2 CHP plant and lower cost of heat utilized in the DH system.
In order to take advantage of the lower investment costs due to economy of scale in procurement and installation and lower financing cost than otherwise would be available to consumers, it is proposed that Rigas Siltums would borrow for the substation investments and be responsible for the replacement of substations, with the title remaining with Rigas Siltums for each substation until the building owner has repaid the investment cost. Repayment schemes of these substation investments from the owners of buildings would be in the form of one payment by the building owner in full or repayment to Rigas Siltums over 10 years in a separate charge under a hire-purchase agreement with an interest rate of 9.5%. The proposed interest rate of 9.5% would provide Rigas Siltums a small spread over its borrowing rate to cover business risk. It is estimated that 90-95% of building owners would prefer to pay the substation costs over time. Special attention may have to be given to some smaller size buildings where the repayment capacity would be consicleredlow.
Given the importanceof the substations to ensure the viability of the Project, Riga City Council approved in December 1999 a Decree requiring the installation, before the year 2005, of modern substations in buildings connected to the district heating system. Regulations for the installation and modernization of substations, defining repayment terrns, were also approved during December 1999.
Financial Forecast
Projections of financial performance of Rigas Siltums over the period beginning October 1, 1999 through September 30, 2005 are summarized in Annex 5 and elaborated in the Project Implementation Plan. The projections have been prepared to determine (a) the average retail heat tariffs that would be required to generate sufficient cash for the debt: servicing and counterpart funding requirements of the project while, at the same time, allowing DH to remain competitive with other alternative heating options, and (b) the conditions under which the company would remain financially viable. The projections have been prepared on a conservativebasis assuming that:
(a) heat demand would gradually decrease as a result of increased energy efficiency in consumer premises;
(b) the two banks of the Daugava River would be interconnected in 2003/04, at which point 85% of the heat required for these two areas would be supplied from the CHP plants;
(c) natural gas would comprise about 95% of fuel required for Rigas Siltums' own heat production with the balance provided by woodchips, mazut, coal and light fuel oil;
(d) gas, mazut, light oil and coal prices would follow world market prices, and prices of woodchips would increase with domestic inflation;
(e) existing assets would depreciate by 9% per year, in line with Rigas Siltums' current depreciation policy, while depreciation of new assets under the project would be based on a 20-year lifetime (i.e 5% depreciation per year on average);
(f) accounts receivable would remain at not more than 45 days of annual heat sales; and
(g) external financing (including the World Bank, Swedish and commercial bank loans) would finance about 70% of net project costs (before taxes). The World Bank and Swedish loans would be 22 made to Rigas Siltums with a 17-year maturityand the commercial banks' loans with a 10-year maturity, all including a 5-year grace period on repayment of principal, and an interest rate, including guarantee fee, of about 7.5% for the World Bank and commercial banks' loans and 8.5% for the Swedish loan. Riga City would contribute about 4% or Ls 3 million (US$ 5.2 million) for substations in public buildings. The remaining 26% of net project costs and taxes would be the responsibility of Rigas Siltums.
With the lower bulk heat tariffs for the increased heat purchased from Latvenergo's CHP plants and operating cost decreases which would be possible as a result of the project investments, the financial projections show that the average retail tariff would remain stable over the next 5 years, after which time the required tariff increases would be less than the rate of domestic inflation. DH retail tariffs would remain competitive with alternative heating options and Rigas Siltums would remain financially viable. During negotiations, agreement was obtained that Rigas Siltums would request the Energy Regulatory Board to adjust retail heat tariffs on a regular basis to allow Rigas Siltums to cover the cost of heat production, distribution, operations and maintenance, depreciation, interest and a profit margin, while remaining competitive with other heating altematives. Agreement was also obtained that the ERB would do so. To properly monitor financial performance and the requirement for tariff adjustments, agreement was also obtained that Rigas Siltums prepare a report annually on or about end-June, beginning in FY 2001 for each year during project implementationcontaining financial projections for the upcorning year to be reviewed by the Bank. The first financial report would be prepared by September 2000 but subsequent reports would be prepared by June 30 of each year thereafter.
The forecast shows that, with the bulk heat tariff decrease, the retail heat tariffs discussed above and the efficiency gains under the Project, Rigas Siltums would be able to contribute the required US$ 50.5 million out of its own funds to the cost of the project and remain financially viable. As a condition for negotiations, Rigas Siltums confirmed that its counterpart contribution to the project would be provided out of internally generated funds. The forecasts show that Rigas Siltums would be able to maintain: (a) adequate working capital (current ratio above 1.3) and (b) adequate debt service coverage (at or above the minimum advisable 1.3). In order to ensure timely availability of counterpart funds and satisfactory financial performance, during negotiations, agreement was obtained that Rigas Siltums (a) maintain a current ratio of at least 1.3.during the project period and (b) maintain a debt service coverage ratio of at least 1.3 during the project period.
Rigas Siltums' current excellent collection ratio of nearly 100% and accounts receivables position of less than 30 days is partly due to the fact that Riga Municipality owns nearly 70% of buildings in Riga City and ensures the full payment of heat bills for buildings under its ownership. When municipal buildings are privatized in the near future, there is a risk that payment performance may deteriorate. Therefore, a sensitivity analysis was conducted assuming accounts receivables increase to 60 days. The analysis showed that, even if accounts receivables were to increase to 60 days, Rigas Siltums would still be able to contribute to the counterpart funding requirements and maintain satisfactory financial performance. In anticipation of the increased risk to bill collection with building privatization, Rigas Siltums has hired additional accountants to enforce and monitor revenue collection performance. During negotiations, agreement was obtained that Rigas Siltums maintains its overall accounts receivable at not more than 45 days.
Fiscal impact:
The project would result in significant fiscal benefits for both the central government and Rigas Siltums. The central government is expected to benefit from the additional tax revenues generated by the project from import duties. VAT on project expenditures, 28% social tax on labor expenditures, 9% labor tax, and 25% corporate income tax on Rigas Siltums' net profit. Rigas Siltums would benefit from the reduction in operating costs resulting from the efficiency improvements and lower bulk heat tariff for heat purchased from Latvenergo's CHP plants.
23 3. Technical: The technical solutions selected for rehabilitation of the DH networks, pumping station and consumer substations represent technology that has been customarily and successfully used for the purpose in Latvia and in East European and other Fonner Soviet Union (FSU) countries. The designs would conform with Latvia's health and technical standards.
The project costs were estimated by Rigas Siltums, its consultants, the World Bank and Sida, based on similar works recently implemented in Latvia and recent quotations for equipment. The project costs include the costs of design and work-site management, which have been estimated to amount to approximately 3% of the investment costs. Physical contingencies are estimated at 2.5% for substation investments and 5% for other investments, which is considered reasonable given that: (a) the number and capacities of substations, the largest cost component, are known accurately and detailed designs have been completed, and (b) conceptual designs have been completed for the rest of the investments. Price contingencies for local costs are based on expected price increases (CPI) of 3.8% in 2000, 4.3% in 2001, 3.9% in 2002 and 2003 and 4.0% each year thereafter. Price contingencies for foreign costs are based on an expected price increase of 2.5% per year during the project period. The corresponding exchange rates that have been used in the preparation of the cost estimate are 0.588 Ls/US$ in 2000, 0.598 Ls/US$ in 2001, 0.606 Ls/US$ in 2002, 0.615 Ls/US$ in 2003, 0.624 Ls/US$ in 2004 and 0.632 Ls/US$ in 2005.
4. Institutional: Institutional Structurefor DH in Riga
The Riga DH system is owned and operated by two companies, Latvenergo and Rigas Siltums, but it is unclear as to whether this is the best arrangement for operation of the system in an efficient manner. In addition, the Government of Latvia is currently considering strategies for the privatization of Latvenergo and Rigas Siltums. Very little analysis has been undertaken up-to-now on how the privatization of Rigas Siltums should be undertaken (i.e., together with Latvenergo's CHP plants or alone). No strategic investors have so far expressed any interest for the district heating networks alone, as the expected return on district heating networks would not be adequate. Therefore, a study would be included under the project, which would look into the optimum institutional set-up for district heating in Riga and the ownership configuration of Rigas Siltums and develop a concensus among the various interested parties and stakeholders. Agreement was obtained during negotiations that Rigas Siltums would undertake a study, under terms of reference and by consultants satisfactory to the Bank, not later than December 31, 2001 to evaluate the optimum institutional set-up and ownership options for DH in Riga and to develop an action plan for the selected institutional set-up and ownership option of Rigas Siltums.
Executing Agency and Project Management
The project would be implemented by Rigas Siltums which has already appointed a qualified Project Manager and a qualified Technical Manager. The Project Management Organization has been strengthened to also include qualified personnel from Rigas Siltums' Accounting and Economics Departments. In addition, international consultants would work with Rigas Siltums' management team during implementationto assist primarily with procurement and project managementrelated matters.
24 5. Social: During project preparation, a social assessment was carried out in Riga to obtain feedback from households on a series of issues related to the provision of heat and hot water. First, the assessment was based on qualitative research using structured in-depth interviews and focus group discussions with residential district heat customers as well as consultations with staff from Riga Siltums, City representatives, housing maintenance organizations, municipal social assistance offices and civil society stakeholders. Second, the assessment was based on quantitative research by means of a questionnaire- based household survey administered to 500 randomly-selected residential district heating and hot water customers. In addition, a supplementary survey was carried out administered to 120 randomly-selected beneficiaries of Riga City's allowance program for housing and utility services providing support to low- income households.
The issues addressed in detail in the assessment are: (i) quality and reliability of the provision of heat and hot water, (ii) level of satisfaction and hardships due to insufficient provision of heat and hot water, (iii) patterns of supplementary heating and other coping strategies, (iv) physical conditions of heat and hot water installations, (v) metering and conservation of heat and hot water, (vi) household budgets and expenditures for heat and hot water by different income groups, (vii) collections, cost recovery and indebtedness, (viii) poverty of residential customers based on detailed data regarding household incomes and expenditures, (ix) affordability, willingness to pay, price-elasticity of demand, and (x) effectiveness of the social assistance in place.
The assessment provided inputs for project design and justification. Specifically,the assessment clarified what level of heating comfort (degrees Celsius of indoor temperature) residential customers would like to have in winter and what they are willing to pay for the desired level of comfort. Similarly, the assessment analyzed what level of hot water comfort (in terms of consumption levels and quality of service provision) residential customers would like to have and what they would be willingto pay for the desired level of comfort. In addition, the assessment provided inputs into the economic analysis of the project as well as insights into financial, fiscal and institutional issues related to cost recovery from residential customers. Finally, the assessment is suggesting measures to improve the effectiveness of the allowance program to support low-income households. A brief summary of key findings of the social assessment is provided below. The detailed results of the social assessment are provided in Annex 9.
District Heating. Residential customers are relatively satisfied with the quality of district heating provided by Riga Siltums, and complaints are moderate. While reporting a temperature of 18.3 degrees, on average, in their flats households consider 20.05 degrees as ideal room temperature. Service interruptions account for only about 1% of heating time citywide. For supplementary heating, residential customers primarily use electric heaters, however, household expenditures for supplementary heating are rather low. Heat losses due to opening windows are small. Households conserve heat primarily by applying weatherstripping to windows and doors. Many households would like to have heat regulators and heat meters both at the building level and in their flats. They believe this would reduce heat consumption and heat bills. The overwhelming majority of respondents is not willing to pay more if the room temperature in their flats would be increased. Elasticity of household demand in response to price increases is relatively low. 36% of the respondents would like to reduce the average room temperature if this reduction would also lead to a lower heating bill. Riga City, in close coordination with Riga Siltums, should provide information and education to Riga's households regarding advantages and disadvantages of different heating options for different categories of residential customers.
Hot Water. Residential customers are relatively satisfied with the quality of hot water services provided by Riga Siltums, and complaints are moderate. Willingness to pay more for improved hot water services is scarce. Hot water consumption drops dramatically after the installation of hot water meters; however, many household cannot afford to buy meters. Elasticity of household demand in response to price increases is moderate. 18% of households don't have hot water services in connection with district heating. The majority of them are not interested in obtaining a connection to the hot water network. 25 Many of these households mistakenly believe that heating water with electric equipment is cheaper than hot water services provided in connection with district heating. Riga City, in close coordination with Riga Siltums, should provide information and education to Riga's households regarding advantages and disadvantages of different hot water options for different categories of residential customers.
Pavine for housing and communal services. Residential customers mostly pay their heating and hot water bills in offices of housing maintenance organizations. A large majority of households indicates that the offices where they pay have inconvenient working hours. 28% of households owe for heating, 18.5% owe for hot water. Households owing for heat and hot water are not predominantely poor. The majority of debtor households owes relatively small amounts of money for heat and hot water. However, these debts account only for small shares of total household debts for both heat or hot water. The debts of a relatively small number of heavily indebted households account for large shares of total household debts for heat and hot water. Also, these debtors are not predominantely poor. A strategy of enforcing cost recovery from households owing for heat and hot water should, in the first instance, target this small number of heavily indebted househLolds.
Allowance vroeram for housinlg-and utility services to low-income households. Riga City's aDlowanceprogram for housing and utility services is the most important social assistance program for low-income households at the local level. The effectiveness of this program has to be strengthened. Several flaws have been identified.. First the coverage of the program deficient. Second, there is leakage of resources to non-eligible households. Third, the application process should be simplified and made more customer-friendly. Fourth, operational and administrative practices of the allowance program should be improved. In particular, program rules and regulations should be reviewed and adjusted and applied more uniformly across city districts as well as under conditions of reasonably controlled flexibility of interpretation. Transformationof the allowance program into a general cash-based poverty benefit scheme may be considered. Also, further computerization is needed as well as computerized communications among allowance offices. In addition, communications with other city agencies and central government departments sihouldbe computerized. Fifth, staffing should be increased and staff training is needed. Complementaryto the proposed project, Riga Municipality has requested assistance to upgrade the effectiveness of the allowance program.
Household budeets and charges for housine and utilities. Household expenditure for district heating amounts, on average, to 32.8% of all household expenditures for housing and utility services, household expenditure for hot water amounts to 8% of all expenditures for housing and communal services. Expenditure for district heating is the largest of all expenditure items for housing and communal services. On average, all expenditures for housing and utilities as a share of total household expenditures amount to 22.12%. Households in lower expenditure quintiles spend more for housing and communal services than households in higher quintiles. On average, food expenditures as a share of total household expenditures amnountto 38.45%. In absolute terms, lower-income households spend much less for food than higher- income households. In relative tenns, higher-incomehouseholds spend less of their total expenditures for food than lower-income householdls. On average, expenditures for housing and communal services as a share of non-food expenditures amount to 35.2%. Mean expenditures for housing and utilities as a percentage of mean expenditures for non-food goods and services are higher for households in lower expenditure quintiles than for households in higher quintiles. Households in the bottom quintiles use most of their expenditures for food, housing, and utility services. Households in the top quintiles are able to use a large share of their expendituresfor goods and services that are neither food items nor charges for housing and utilities.
6. Environmental assessment: Environmental Category I I A [XI B 1 ] C
Preparation of the proposed project has included environmental studies consistent with the requirements of the Latvian environmental regullations,and the provisions of the World Bank's Operational Directive on Environmental Policies. In accordance with these procedures, an environmental review, consistent 26 with the requirements for a category "B" project for the district heating rehabilitation component of the project has been performed. The final version was completed on April 26, 2000.
The project would have significant positive environmental impacts in Latvia. The decreased amount of fuels required for heat and electricity production due to increased co-generation, elimination of oil and coal-fired boilers and the reduction of gas usage in the present system due to the better efficiency would have beneficial air quality impacts through reduced emissions as shown below. In addition, water losses in heat distribution and consumption would be reduced.
Environmental Tons Emissions CO2 SO2 NOx dust HC CO Without Project 2,070,000 11,600 6,050 767 17 671 With project 1,520,000 5,370 4,960 109 13 316 Improvement 550,000 6,230 1,090 658 4 355
The environmental review showed that potential harmful environmental impacts might result from the removal of asbestos from old thermal insulation in DH equipment. If asbestos is found when dismantling old thermal insulation, all works on such insulation should be performed according to Latvian and European work safety standards by specialized companies utilizing specialized equipment. Asbestos should be disposed of in an environmentallyacceptable way according to regulations. Further, all new insulation materials that are used in the proposed project should have a zero ozone depletion factor (i.e., no CFC would be accepted).
7. Participatory approach:
,Primarybeneficiaries and other affectedgroups The primary beneficiaries of the project are residential and public consumers, including a large number of low-income users, including pensioners. They are participating in the project design through consultationsbased on (a): in-depth interviews and focus groups; and (b) a household survey.
Other key stakeholders Key stakeholders of the project are the Riga City Government and the City Council, Rigas Siltums and local private firms supplying goods and services related to the provision of heat. These stakeholders have participated in the project through consultations based on in-depth interviews and focus group discussions.
In addition, the Steering Committee comprising all the key concerned parties, including Rigas Siltums, Riga City Council, Latvenergo, Latvian Privatization Agency, Ministry of Economy, Energy Regulatory Board and the Swedish Government's Aid Agency, Sida, have had regular meetings to guide the preparation of the project. Further local groups and NGOs have been consulted during the public awareness campaigns and will be further consulted in a structured manner during the social assessment survey. Other key stakeholders are the sellers of bulk heat and fuels to the DH enterprises. In Riga, Latvijas Gaze and Latvenergoare participating in the Steering Committee.
27 F: Sustainability and Risks 1. Sustainability: The project would contribute to ensuring the sustainability of Riga's heating and hot water services through: (a) the introduction of least-cost technologies for improving heat supply and optimization of the system service areas and network configurations; (b) facilitating the recovery of the costs of services through the loweringof supply costs leading to more affordable tariffs; (c) promoting energy conservation through the introduction of regulation of indoor temperatures by the consumers at the building level; and (d) supportingcommercial principles for the operation and financial managementof Rigas Siltums. 2. Critical Risks: (reflecting assumptions in the fourth column of Annex 1) Risk Risk Rating Risk MinimizationMeasure
From Outputs to Objective Timely heat tariff adjustments to reflect changes in Given the commitment by the fuel and input costs may not be sustained due to M Energy Regulatory Board and political or other reasons Rigas Siltums to adjust heat tariffs to cost recovery levels over the past several years, the risk of tariff adjustments not being implemented is expected to be small. Agreement on the regular adjustment of tariffs would be a loan condition Political and budgetary commitment to funding The requirements for improving Riga City's social assistance program may not be M the functioning of the social sustained assistance program has been evaluated during appraisal and support would be provided under the project as necessary
From Components to Outputs Counterpart funds for the project investments may Adequate plan for provision of not be available in a timely manner M counterpart funds was a condition for negotiations Untested implementation capacity of the project Detailed implementation agencies in carrying out an investmnentprogram of arrangements were fully this order of magnitude, which rnay result in a identifiedand agreed in advance longer implementationperiod M with staffing arrangements in place as a condition for negotiations; the project agency to be supported by foreign and local consultants with relevant experience in heating projects and institutionaldevelopment Overall Risk Rating M
Risk Rating -H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligibleor Low Risk)
28 The ability of Latvenergo to sell heat from its CHP plants at the bulk heat tariff assumed in the financial and economic analyses depends on the electricity price that these CHP plants can obtain when electricity is sold to the power grid. Bulk heat tariffs are influenced by the bulk price of electricity, since heat and electricity are joint products in the Riga CHP plants. Thus, a low electricity price pushes heat tariffs up, to allow cost recovery for the CHP plants and vice versa.
Discussions are underway with the other Baltic countries to form a Common Baltic Electricity Market, which would aim to join and liberalize their electricity markets in line with European Council Directive 96t92/EC. In addition, discussions have also been ongoing to connect the Baltic power system to the Western European system to form the Baltic Ring Electricity Market by connectingthe Baltic electricity system to Finland and/or Poland and separating it from the frequency of the Russian electricity system. The uncertainty related to the possible future development of the Common Baltic Electricity Market and/or the Baltic Ring Electricity Market is not judged to pose any substantial risks for the future continued ability of the Riga CHP plants to sell heat at a bulk tariff that would allow the DH service in Riga to remain competitive with other heating options, as it is likely that CUP generation will continue to be attractive under all scenarios.
Three scenarios have been considered: (a) status quo where no Common Baltic Electricity Market or Baltic Ring Electricity Market would be established; (b) the Common Baltic Electricity Market would be established; and (c) the Common Baltic Electricity Market would be expanded into the Baltic Ring Electricity Market with Western Europe.
The first scenario refers to the continuation of the current situation and where no Common Baltic Electricity Market would be established during the timeframe of the project. In this scenario, the electricity supply from Riga' s CHP generation would broadly determine the wholesale electricity price in the Latvian grid, as it would be unlikely that, in the long run, import electricity would be available at a lower price than Riga' s CUP generation cost. In the analysis for this project, it has been assumed that the probable long-termaverage wholesale electricity price would remain at the present value of US$26/MWh. At this tariff, Latvenergo would be able to reduce the bulk heat tariff from today's level because of the greater utilization of the existing capacity of Riga's CHP plants due to the project investments. In 1999, Latvenergo has been able to import electricity at an average price of US$ 22/MWh, which is currently lower than the long-term cost but higher than the short-run marginal cost of about US $12/MWh of Riga's CHP plants. However, the current low electricity import price is unlikely to be sustainable over the mediumto long run. Therefore, in this scenario there is no serious risk to project's viability.
The second scenario assumes that the Baltic countries would establish a competitive Common Baltic Electricity Market. In this case, the price-setter in the market would become Lithuania's Ignalina nuclear power plant, which is the second lowest cost plant (US$19-20/MWh) after hydropower plants in the Baltic region. Despite the fact that Ignalina's capacity is sufficiently large to supply electricity to Latvia at a lower cost than the Riga CHP plants, as long as Ignalina continues to operate, the viability of the proposed project is not judged to be significantly at risk. The reasons for the low risk to the project include the following: (a) since Ignalina has to be connected to the Russian electricity system for stability and reserve reasons, a substantial share of Ignalina's export capacity is directed towards Belarus which would limit the amount of export capacity available for Latvia; and (b) as closure of Ignalina is part of Lithuania's EU accession process, the Lithuania Parliament has decided that one of Ignalina's two units will be shut down in early 2005, right after the planned expansion of Riga CHP's utilization, leaving no significant export capacity and the second unit would be expected to be closed within four years thereafter. When Ignalina is closed altogether, then wholesale electricity prices would be driven by the cost of CHP generation, which would then be the next lowest after hydropower in the Baltic region, which would ensure the viability of the project.
The third scenario concerns the Common Baltic Electricity Market interconnected to Poland and/or Finland forming the Baltic Ring with Western Europe. Under this scenario, the excess coal-fired generating capacity in Germany, Poland and Denmark would compete in the Baltic Ring Electricity 29 Market, driving electricity prices in the market towards the short-term marginal costs of these old and largely depreciated plants, which are currently about US$ 20-25/MWh. Even at these prices, this scenario is not judged to be a serious risk to itheviability of the proposed project because: (a) establishing a Baltic Ring would require costly investments, including, inter alia, construction of an interconnector to Poland and/or Finland and isolation of the Baltic network by direct current links from the frequency of the Russian electricity system, raising the cost of transmission services so that electricity would not be able to compete with the electricity from Riga's CHP plants; and (b) the European Union is expected to comply with the Kyoto Protocol requiring a1reduction of CO2 emissions which would likely lead to introduction of environmental taxes on coal-fired generation, thereby significantly raising the cost of electricity from these plants.
3. Possible ControversialAspects:
No major controversialaspects have been identified.
30 G: Main Loan Conditions 1. EffectivenessConditions: Conditionsof effectivenesswould include:
(a) Submissionof satisfactoryevidence that all conditions precedentto the effectivenessof the loans from the co-financiershave been fulfilled;
(b) A guaranteecontract has been entered into between Latvia and Rigas Siltumsfor the World Bank loan providedto Rigas Siltums;
(c) A Memorandumof Understanding between Rigas Siltums and Latvenergo on cooperation in efficient use and realization of the heat energy generated by CHP plants under the Project has been entered into.
2. AgreementsReached during Negotiations:
Agreementsreached during negotiationsinclude: (a) Lending and other arrangementsfor the World Bank Loan;
(b) Rigas Siltums to maintain until project completion a PMO with functions and responsibilities agreed with the Bank and ensure that the PMO at all times (i) is headed by an experienced Project Manager, (ii) has adequate staff, and (iii) is assisted by consultants, as needed, all with qualifications, experienceand terms of reference satisfactoryto the Bank.
(c) Arrangementsfor disbursementand for establishingand operatingthe SpecialAccount;
(d) Accountingand auditing requirementsof the project;
(e) The timing of the mid-termreview and reportingand monitoringrequirements of the project;
(f) Rigas Siltumsto undertakea study,under terms of referenceand by consultantssatisfactory to the Bank, not later than June 30, 2001 to evaluate the applicabilityof two-tier heat tariffs, with a particular emphasis on raisingpublic awareness;
(g) Rigas Siltums to request the Enregy Regulatory Board to adjust heat tariffs on a regular basis to allow Rigas Siltums to cover the costs of heat production, distribution, operations and maintenance, depreciation,interest and a profit margin, while remainingcompetitive with other heating alternatives;
(h) The Energy Regulatory Board to adjust heat tariffs on a regular basis to allow Rigas Siltums to cover the costs of heat production,distribution, operations and maintenance,depreciation, interest and a profit marginunder efficient operations;
(i) Rigas Siltums to prepare a report annuallyon or about end-June, beginningin FY 2001, for each year during project implementationcontaining financial projections for the upcomingyear to be reviewed by the Bank;
(j) Rigas Siltums to maintain (i) a current ratio of at least 1.3 during the project; and (b) a debt servicecoverage ratio of at least 1.3during the project period;
(k) Rigas Siltumsto maintain its overallaccounts receivablesat not more than 45 days; and
(I) Rigas Siltumsto undertakea study,under terms of reference and by consultantssatisfactory to the 31 Bank, not later than December 31, 2001 to evaluate the optimum institutional set-up and ownership options for DH in Riga and to develop an action plan for the selected institutionalset-up and ownership option of Rigas Siltums.
3. Condition of Disbursement A condition of disbursement would be that no withdrawals shall be made for the river-crossing pipeline, pumping station and other necessary network until Rigas Siltums and Latvenergo have concluded a contract, satisfactory to the Bank, on cooperation in efficient use and realization of the heat energy generated by the CHP plants under the Project.
H: Readiness for Implementation
[ X I 1. a) The engineeringdesign documents for the first year's activities are complete and ready for the start of project implementation. 1 I 1. b) Not applicable. [X ]2. The procurementdocuments for the first year's activities are complete and ready for the start of project implementation. [X] 3. The Project ImplementationPlan has been appraised and found to be realisticand of satisfactory quality. [ 1 4. The followingitems are lacking and are discussed under loan conditions(Section G):
1: Compliance with Bank Policies
[XI 1. This project complies with all applicable Bank policies. 1I 2. The followingexceptions to Bank policies are recommended for approval. The project complies with all other applicableBank policies.
Team Leadfr: Ms. Carolyn Gochenour
Sector Nlanager: Mr. Henk Busz
Country Director: Mr. Basi , Kavalaky
32 Annex 1: Project Design Summary
Latvia: Riga District Heating Rehabilitation Project
Sector-relatedCAS Goal: Sector Indicators: Sector /Country Reports: (fromaGoal to Bank To help Latvia to address * Reduction of energy * Energy import statistics Mission) municipal, environmental and wastage in heating * Fuel consumption * Reduction of energy public utility issues and systems statistics of heating wastage and increase contribute to enhancing * Development of enterprises in domestic power capacity in these areas commercial companies * Data from Enterprise production resulting in * To assist in adoption of sound for heating services Register reduced energy energy pricing policies and * Attraction of donor and * Investment statistics in imports will contribute commercial utility practices private sector financing heating sector to economic growth * To pave the way for the for investments in * Private sector and thus facilitate eventual privatization of heating systems shareholdings in heating poverty alleviation in heating utilities and for * Reduction of enterprises Latvia attraction of private capital environmental pollution * Emission statistics
Project DevelopmentObjective: Outcome/ Impact Project Reports: (froin Objectiveto Goal) * To optimize DH system Indicators: * Semi-annual progress * The current co- operational performance, o Improved quality and reports and evaluation generation plants in increase the efficiency of heat affordability of heating reports at mid-term and Riga continue to sell supply and distribution, and hot water services project completion bulk heat at affordable improve reliability of service in Riga * Semi-annual progress prices delivery, enhance energy * Improved commercial reports and evaluation * Distortions in gas conservation, and improve performance of Ri gas reports at mid-term and pricing policies and environmental conditions in Siltums company project completion. pricing of heat from the Riga DH systems ClIP plants are * To promote sound cost removed recovery policies and * Heat tariffs continue to practices to allow for the be regulated at cost competitive development of recovery levels Rigas Siltums Outputfrom each component: Output Indicators: ProjectReports: (from Outputsto * Improved and more a Share of heat utilized * Semi-annual progress Objective) affordable beating and hot from TEC 2 plant reports and evaluation * Beneficiaries are water services in Riga * Heat and make-up reports at mid-term and willing to pay their * Improved commercial water losses in the DH project completion bills in a timely performance of Rigas Siltums system * Semi-annual progress manner for improved * Bulk and retail heat reports and evaluation heating and hot water tariffs reports at mid-term and supply quality * Financial performance project completion. * Riga Municipality indicators of Rigas ensures adequate Siltums (e.g., debt funding of the social service coverage ratio, assistance program for current ratio, accounts vulnerable groups receivables, * Energy Regulatory profitability) Board approves cost c o v errec rt ______re o v ry riff
33 Project Components/Sub- Inputs: (budget for each Project Reports: (from Components to components: (see Annex 2 for component, net of taxes) Outputs) project description) Progress reports and Counterpart funds would * Riga DH rehabilitation US$ 135.2 million disbursement reports be available in a timely * Institutional support: manner * Implementation Support Progress reports * Social Assistance U.S$ 2.4 million Rigas Siltums project Support management staff would * Two-Tier Tariffs be in place in a timely * Rigas Siltums manner, supported by Institutional Strategy experienced foreign and local consultants
34 Annex 2: Project Description
Latvia: Riga District Heating Rehabilitation Project
Riga DH improvement physical component - US$ 135.2 million
The component includes: (a) installation of autornated consumer substations for all buildings to allow for the introduction of variable flow, and thereby facilitating dispatching of the heat load from the most efficient and, at present, underutilized TEC 2 CHP plant as well as to facilitate heat energy savings at the consumers; (b) replacement of corroded DH pipe sections in the worst areas to abate the leaks and to increase the remaining life of the DH assets; (c) construction of a pipeline interconnection of the right and left bank networks of the DH system and a pumping station to allow the left bank network heat demand to be served from CHP plants; (d) various improvements at Imanta boiler house to convert it to peak load and reserve plant, such as water treatment and controls; and (e) elimination of a number of small coal and mazut-fired boiler houses by connecting the heat load into the main DH network.
Institutional support component - US$ 2.4 million
The component includes: (a) consultancy services for implementation support for Rigas Siltums in the areas of procurement, project financial reporting and disbursement; (b) consultancy services for Rigas Siltums to assist in the evaluation of the applicability of two-tier heat tariffs with fixed and variable components, with a particular emphasis on raising public awareness on the suitability of this tariff structure; (c) advisory services for Riga Municipality to improve the functioning of its social assistance program; and (d) consultancy services to evaluate ownership options and to develop an action plan for the selected institutional set-up of Rigas Siltums. A breakdown of the costs (in US $ thousands) and implementation schedule for the institutional support program is as follows:
Institutional Support 2000 2001 2002 2003 2004 Total Implementation Support 400 400 400 400 1,600 Social Assistance Support 50 50 100 Tariff Study 500 500 Rigas Siltums Institutional Strategy 200 200 Total 450 1,150 400 400 2,400
35 Annex 3: Estimated Project Costs
Latvia: Riiga District Heating Rehabilitation Project
Consumer Substations (7,235 substations) 21.7 28.7 50.5 Network Rehabilitation 10.0 14.0 24.0 Interconnection Network 6.9 10.3 17.2 Daugava Pumping Station 0.6 0.6 1.2 Production Plant Rehabilitation 1.0 2.4 3.4 Elimination of Inefficient Boilers 1.0 1.5 2.6 Design and Site Management 3.2 3.2 Institutional Support 2.4 2.4 Base Cost 44.4 60.0 104.4 Physical Contingencies 1.5 1.9 3.4 Price Contingencies 5.0 4.2 9.1 Project Cost Net of Tax 50.9 66.1 117.0 Taxes 20.6 20.6
Total Project Costs 71.5 66.1 137.6 Interest during construction 4.0 4.0 Front-end fee on World Bank Loan 0.4 0.4 Total Financing Required 71.5 70.4 141.9
I ~ N
Goods 63.7 63.7 Works 47.2 47.2 Services 3.7 2.4 6.1 Taxes 20.6 20.6 Total Project Costs 71.5 66.1 137.6 Interest during construction 4.0 4.0 Front-end fee 0.4 0.4 Total Financing Required 71.5 70.4 141.9
Note: Numbers may not add up due to rounding.
36 Annex 4: Cost-Benefit Analysis Summary
Latvia: Riga DistrictHeating RehabilitationProject
Table 4.1: Cost Benefit Analysis Summary (US$ mnillionof 1999) DiscountedProject Flows Distribution _Impact Economic Financial Poor Fiscal Benefits 112.4 110.7 Costs 87.6 105.2 _ Project Indicators * NPV 24.8 5.5 * IRR 16.1% 11.1% * Distribution Coefficient 49.5% 25.2% Probability of Achievement 65.3% 58.2% 35.2% 62.2% Results with a 75% Probability of Achievement IRR 13.0% 10.0% Distribution Coefficient 33.0% 22.2%
A. Overview. An economic analysis was conducted to verify that the proposed project is the least-cost altermative, that the benefits justify the costs, and that its economic profile is robust against the uncertainties that may affect its development. The appraisal includes least-cost analysis, economic and financial cost benefits analyses, risk and sensitivity analyses and distribution analysis of the discounted costs and benefits among the principal stakeholders.
B. Least cost analysis. The least-cost analysis of the proposed expansion investments shows that district heating is a lower-cost option than the option of decentralized gas boilers in individual buildings in the project areas. These results are largely explained by the high heat load densities in the areas served by the project and the higher efficiency of DH supply relative to decentralized boilers. With the help of a simplified spreadsheet model, the least-cost option for heating in Riga has been examined. The figure following summarizes the results.
The model compared the heating costs of consumers in two greenfield type of centralized heating situations (heat only boilers, and when heat is a by-product of power generation at zero cost') with individual gas-fired mini-boilers. In the greenfield scenarios, it is assumed that no sunk costs for any equipment or pipeline networks exist. In summary, the model compared the long-run costs at the user level of:
* Gas-fired centralized boiler plant with hot water DH network, automated substations and metering * Centralized boiler with hot water DH network, automated substations and metering, where heat cost at the generation CBP plant is a by-product at zero fuel cost, and * Decentralized heating with gas mini-boilers.
'This alternative is useful for comparison purposes for providing the absolute lower limit below which no centralizedheat source (whetherbased on inexpensivesurplus heat, co-generation,free heat from waste incineration or CHP, etc.) can be less expensivethan heat from individualboilers. 37 CentralizedVs DescentralizedHeating
US$/Gcal Averagedensity in Riga
35 - ..-----.----.-.-.. .- ..- 30^...... *;;. 25 ...... 20 -...... ,N...... DOHoption 15 ^. . " "...... 1 ...... a DH at zero fuel cost
10 ...... I...... - ... I.l..... *-... Mini-boilersoption 5 -.-.------.------. ------
0 2 4 6 8 10 Lineardensity GcaVm The figure shows that for high heat load densities (more than 5.5 Gcal per linear meter of DH network), centralized DH is the preferred option as it would have a lower cost. For low heat load densities (less than 2.0 Gcal per linear meter of DH network), gas-fired mini-boilers are the preferred option. Where heat load densities are between 2.0 (ical and 5.5 Gcal per linear meter of DH network, a detailed analysis using actual fuel and heat production costs at the plant would be necessary to determine the preferred option.
As Riga has an average heat demand of 3.8 Gcal per linear meter of DH network, a more detailed analysis has therefore been performed. Costs at the same level of heat demnandfrom DH and individual boilers were compared. The least-cost analysis was performed in constant US$ of 1999. A discount rate of 10% has been utilized, reflecting the opportunity cost of capital in Latvia. The table below clearly shows that the option of rehabilitating the DH system is a lower cost option than the introduction of individual gas- fired mini-boilers in buildings. The assumptions utilized for calculating the costs of each scenario are explained following. Table 4.2 Least Cost Analysis (US$ '000 of 1999) Alternatives PV @ 10% Project Scenario 30,091 Individual Boilers 62,505 ------_. ------...... -_.- - - --..- _ I.- __ .w+.---.?Mou..oss:vo_.^-e Cos Dffence tothe F~0: 7 7 32,414
Project Scenario. Upgrade costs refer to the economic costs of the investments required to rehabilitate the DH system. The economic costs of the investments correspond to the financial costs net of price contingencies, taxes and financial transfers and corrected for distortions in the price of labor by using a conversion factor of 0.91 for skilled labor and 0.73 for unskilled labor. Operation and maintenance (O&M) costs are calculated by multiplying the unit O&M cost per Gcal times the incremental DH production -"production with" minus "production without" the project. The incremental fuel costs are calculated from the unit costs with the project times the increased DH production. The estimation considers the differences in plant efficiencies and share of mazut and natural gas respectively for the "with project" situation. In other words, fuel costs are estimated for the comparable heat demand and incremental DH production. It is important to note that the improvements result in more efficient production and distribution. Fuel costs with the project thus decrease over time. The fuel cost forecast
38 has been prepared in real terms2 as shown below and is used in the least-cost analysis and the economic analyses. The valley and peak in the figure are explained by the historical and current (1997 to 1999) contracted gas and mazut prices. As of 2000, Latvian fuel prices are expected to follow the price trends in the Europeanfuel markets.
Latvia Fuel Prices in Constant US$ of 1999
90
85 -
80 - ) 75 -I II - - - Gas$1000m3
70 - Mazut $/ton 65
60-.,. 1 t I ...... ,A\ 999 wN §o° &o°wo° wo9 woe woo w0,A0
A large quantity of heat supplied to customers is produced in Latvenergo plants TEC 1, TEC 2 and Andrejsala. Rigas Siltums purchasesthis heat at a contractedprice. With the project, where the right and left networks are to be interconnected,more heat can be produced in Latvenergo plants, decreasing the unit costs and the price of heat sold to Rigas Siltums. A lowered heat cost means that the Project Scenario would result in savings in the cost of heat.
The incremental auxiliary electricity cost is equal to the forecasted electricity sales price (to the grid) multipliedby the comparableheat demand, which is then multiplied by auxiliary electric load ratio. The value of the incrementalelectricity sales is estimatedfrom the additional power delivered to the grid times the expectedsales price of electricity.
The energy conservation savings result from the reduced heat consumption due to the reconstructionof consumer substations,allowing customers to regulate their heat consumption. Improved heat regulation will lead to energy savings which are valued in terms of fuel savings. Automated substations will make heat regulationin the buildings more accurate and reduce the overheating of flats, typical in constant flow systems. Overheatingin constant flow systems is usually managed by opening windows, which will not be necessary after the installation of new substations. Consumers will be able to tailor heat demand accordingto the desired thermal comfort and individualaffordability. Based on experiencein other similar projects, automated substations will lead to physical heat energy savings in the range of 10-25%,a significantbenefit once fuel savings are considered.
2 Source: World Bank Comnodity Markets and the DevelopingCountries, April 1999
39 The energy conservation benefit was estimated considering a mean expected energy conservation parameter of 20.5% (considering a normal probability distribution with a lower extreme value of 10% and a maximum of 25%). This probabi]istic parameter was applied to the annual DH heat output without the project to yield the expected energy savings. The energy savings were then valued according to the unit system cost without the project. Unit system cost is the cost of delivering a Gcal of heat without the project, and the major share of the cost is the fuel cost. The unit cost considers the shares of mazut (31.9% for the without project scenario) and gas, as well as the plant efficiencies (86.7% for the without project scenario). This is summarized in the following formula:
[Energy Conservation I[UnitSystem Energy Conservation) (Total DH I Benefit Cost L Parameter ) ( Output )J
Individual Boilers Scenario. Investment costs of individual boilers in 1999 prices is assumed to be $ 136,970 per Gcal/hr. Total investment is calculated at this unit cost times the difference between the original network capacity of 1,350 G3cal/hrand total network capacity without the project in each year. The estimated gross investment is further adjusted by the factor accounting for the difference in equivalent full load hours for district heating (2,600 hours) and individual boilers (2,200 hours). The O&M costs of individual boilers are estimated at 3% of the (accumulated) capital investment in individual boilers. The calculation of fuel costs is based on the required net production of mini-boilers, the expected 80% efficiency of mini-boilers, the forecast prices for gas in Latvia and the energy content of gas, assumed at 8 Gcall1000 m3.
C. Economic Analysis. The economic analysis compares the economic costs of the project with its economic benefits. All costs and benefits are valued at 1999 border prices and are incremental in nature, valued as the difference between the costs/benefits "with the project" and "without the project." The economic costs and benefits are net of financial transfers, such as taxes and interest payments. Of the project investments that started in 1999, about 10% would have been required also in the without project situation, and thus have been deducted from the investments in that year. Shadow prices for foreign exchange costs were not required for the analysis, since the current exchange rate is judged to be a market-clearing rate. In Latvia, as in other transition economies, the economic cost of labor is generally lower than the financial cost because of unemployment and underemployment at the ongoing wage rate. A 0.91 conversion factor for skilled labor and 0.73 for unskilled labor has therefore been assumed. The costs and benefits are considered over the economic life of the investments of 20 years. A discount rate of 10% has been assumed. The table below presents the PVs of the cost and benefit of the project.
Table 4.3 Present Values of Economic Costs and Benefits (US$ '000 of 1999) Costs Beneflts l& I Fuel I Total |Willinigness to Flay I Loss | Heat |Reliability I O&M I Total N4et InvestmentI & Costs |Costs |Sale upu I reduction|conservation Iimprovement I savingsI Benefits Benefit 77,790 917 8,938 87,645 33,350 3,079 3,968 54,371 14,043 3,592 112,402 2,5
On the cost side, the project investment costs include the proposed rehabilitation project, including design and site management costs and physical contingencies. The O&M and fuel costs are the additional costs to be incurred if the project is implemented, i.e. the associated costs to the increase DH production.
The economic benefits are based on: (a) what consumers would be willing to pay to avoid a deficit in heat supply, (b) reduction of losses in the DH system, (c) energy savings from consumer substations, (d) improvements in reliability in the DH service, and (e) savings in operations and maintenance (O&M) costs.
40 The largest benefit corresponds to the energy conservation made possible from the regulation by users of their heat use, which is not possible without the project. These conservation savings, valued in terms of fuel savings, are fairly robust, as has been witnessed in other similar projects where constant flow systems have been converted to variable flow systems. The social assessment has confirmed that: (a) 81.3%% of the households surveyed wanted heat regulators, considering they would consume and pay less; (b) 12% of households considered the temperature to be too hot during some part of the heating season; and (c) about 10% of households opened their windows to lower the temperature and obtain fresh air.
The willingness to pay (WTP) for the additional supply of heat is the second largest benefit of the project. WTP consists of the increase in sales revenues and the estimated consumer surplus. Consumer surplus is defined as the difference between what consumers are prepared to pay for heating and what they actually pay. When a project prevents an increase in prices, more consumers have access to heating services and the existing consumers pay a lower price for the same amount of heat consumed. When the project prevents a demand deficit, it actually prevents the price from rising under competition to the level of demand that would reach equilibrium with the constrained supply. If without the project the delivered heat supply is lower than the heat demand, then the willingness to pay to avoid the demand shortage will be the estimated deficit times the heat sales price, plus the consumer surplus.
In the analysis, a constant elasticity curve has been used, which yields more conservative estimates of WTP, as compared to a constant slope demand curve. For the purpose of estimating willingness to pay benefits, the constant elasticity curve, i.e., P = AD A(l/e), has been used, where P stands for price, D for demand, e for the elasticity, A is a constant, and A means "to the power of." The graph below illustrates the shape of the curve for various heat prices. Riga's current annual heat demand of 3,288 Tcal is located at the middle of the curve at the equivalent heat price of US$ 24.3 per Gcal.
Based on comparative analysis, a price-elasticity for heat demand of -0.8 for all customers has been adopted. The ice elasticity is calculated as the relative change in heat demand over the relative change in price. If demand declines by 8% given a 10% increase in price, the elasticity would be -0.8. The results of the social assessment also suggest a long-run price elasticity of demand close to -0.8, in line with the experience in the Kiev, Ukraine heat rnarket.
Heat Dermnd Curve
160 140...... 120 ...... 100 ...... I...... I 80. .. .
c) 60 ...... )0 Currentprice S 24.3for 3,288 Teal of 404.-......
0 0 2,000 4,000 6,000 8,000 10,000 12,000 Demand '000 Gcal
The loss reduction in the DH network stems from the reduction in energy requirements due to improvements to the DH network. These are valued in terms of the fuel savings due to the project. When calculating the benefit, respective plant efficiencies, the fuel structure and forecasted fuel prices have been taken into account. 41 The reliability improvement benefit is based on the economnicvalue of unserved heat. Although, the DH system in Riga is reliable and unplanned breakdowns are unusual, there are however system shutdowns in the Spring and Fall. The social assessment showed that, although few respondents complained about heating interruptions, 40% of thern did report heating interruptions. Also, supply temperatures are allowed to decrease during the coldest winter days, reducing the customers' indoor temperatures below their demand. According to the estimates, 10% of heat is not supplied due to non-uniform indoor temperatures. In the estimation of the reliability benefits, the total cost, including delivery of the incremental heat that would be possible with the project, was considered.
The value of unserved heat can be estimated based on: (a) the substitution costs of alternative heating methods, and (b) the economic value of damages caused by undelivered heat. The first method provides a conservative estimate because not every household can afford to purchase an electric space heater. Consumers that cannot afford an electric heater bear all the costs associated with the increased sickness rate, work absences and loss of income due to a prolonged heat supply outage. The second method provides a better estimate. "Underheating" causes other economic damages to households, commercial and industrial users. There are direct and indirect production losses where heat is one of the main inputs, mechanical damages in buildings' heating systems, and in building structures (insulation, painting, etc.) due to moisture. Consequently, the cost of unserved heat varies considerably depending on the time of the year, consumer type, duration of interruption, etc.
In this analysis the first method has been used, based on the economic cost of heat from electric space heaters, the most conimonly used form of substitution for heating during the coldest spells. It is assumed that electrical heaters will be used to supply a part of this amount of unserved heat, mainly in the coldest days, for non-sleeping hours and for interruptions longer than an hour. However, not all tenants can afford electric heaters, only medium and high-income tenants can. Once the systems are rehabilitated, these costs of supplementary heat disappear for the tenants. These savings are thus a benefit to the project. Based on the social assessment, it has been assumed that about 1/3 of the customers are using electric heaters as substitution for DH when the heat supplied by the utility is insufficient. It is estimated that the operation time for electrical heaters will be 2.7% of the heating season (4,320 hours currently) = 118 hours.
The estimates suggest an economic cost of unserved heat of $83/Gcal (71 US$/MWh), based on a unit cost of an electric heater of $24 per I to 1.5 kW, with an expected 5 year average service life and an electricity econornic cost of $37.7/MWh (43.80 $/Gcal). The table below presents a summary of the assumptions used in the calculation.
Table 4.4 Calculations of Outage value Concept Unit Value Electric heater (1 - 1.5 kW) $ per unit 24 Life years 5 Thermnaloutput Gcal/h 0.00129 Average usage hr./yr. 118 Discount rate 10% Capital recovery factor 25.0% Cost of electricity $/Gcal 43.84 Annual output Gcal 0.15 Annual capital cost S/yr 5.94 Capital cost per uniit $/Gcal 38.95
Outage value $/Gcal 82.8
42 The electricity economic cost is based on the estimate of the long-run marginal cost (LRMC) of electricity, which is defined as the incremental system expenditures (investment and operating) to meet the forecast increment in demand over the planning horizon. The LRMC for power has been used in the economic analysis to align future tariffs with opportunity costs and thus value the increase in willingness to pay made possible by the project, and to estimate the net improvement in reliability. The LRMC has been estimated assuming a new combined cycle plant is constructed in Latvia or in any other neighboring country using a condensing steam turbine (no combined heat and power) and burning natural gas. A 10% discount rate has been assumed. The LRMC of electricity has been calculated to be about US$ 37.7/MWh. The table below presents the parameters and assumptions of the LRMC calculation.
Table 4.5 New combine cycle powe generation Assumptions Values Units Investment 845 US$/kW Maturity 25 Years Discount Rate 10 % Annual installment 0.11 Plant efficiency 55 % Operation time 5,000 Hours O&M (incl. Staff costs) 5.0 US$/MWh Natural Gas price 80 US$/m3*1000 Total Natural Gas price at plant 8.62 US$/MWh Capital cost 18.6 US$/MWh Variable cost excl. O&M 14.1 US$1MWh Variable cost incl. O&M 19.1 US$/MWh Total production cost (LRMC) 37.7 US$/MWh
The O&M benefit stem from the savings made in different parts of the DH system. These savings are applied to the level of demand that would be supplied without the project.
Further unquantifiable environmental benefits would result from reduced emissions of S02, NOx, CO2 and dust due to lower fuel consumption (and for some plants, due to improved combustion control).
D. Project Financial Cost-Benefit Analysis. The financial analysis compares the project costs with the project benefits. All costs and benefits are expressed in constant prices and are incremental in nature, valued as the difference between the costs/benefits "with the project" and "without the project." The analysis was carried out over the period of the expected life of the investments of 20 years. The table below presents the PVs of the financial flows. The financial net present value (FNPV) amounts to US$5.5 million and the financial rate of return (FRR) to 11.1% with a 58.2% certainty. With a 75% probability of occurrence, the FNPV is certain to cover costs, breaking even and yielding at least a FRR of 10.0%, equivalent to a nominal FRR of 14.4%, both of which are considered robust and satisfactory when compared with the cost of capital in Latvia of 10%. The project has an acceptable payback period of 11 years, and a low probability of achieving a negative outcome of less than 25%.
Table 4.6 PresentValues of FinancialCosts and Benefits (US$ '000 of 1999) Costs Benefits Operation System Total Sales Heat Purchase Loss Unserved Total Net Investments Maintenance Costs Costs Revenue Savings Savings energy Benefits Present Value 95,331 917 8.938 105,186 33,350 12.801 61,931 2,610 110,691 5,505
For the calculation of the FNPV, the same financial flows the utility will face over the life of the project has been assumed. On the cost side, Rigas Siltums will have outlays for the project's capital costs, fuel 43 and O&M system costs. On the benefits side, the company will have sales revenue, savings in the bulk heat purchases from Latvenergo, expenditure savings from lower losses, and higher sales from the improvement in reliability (less unserved energy) than would be possible without the project.
For the calculation of the FRR, the cost stream includes all the costs incurred to construct, operate and maintain the project facilities over the useful life of the investments, and the benefits are the gross revenues derived from the project. The FRR is measured as the discount rate which equalizes the present value of the cost stream associated with the project to the present value of the project's benefit stream. The FRR indicates the maximum interest rate that Rigas Siltums could pay on the capital invested in the project and still break even financially.
All of the costs and benefit items have been explained previously. Regarding the savings in bulk heat purchases, a large quantity of heat supply comes from Latvenergo plants TEC 1, TEC 2 and Andrejsala. Rigas Siltums purchases this bulk heat at a contracted price. With the project, there would be an increase in heat production and lower unit costs in Latvenergo plants. This means that Latvenergo would decrease the price of heat sold to Rigas Silturns. A lowered bulk heat price means that the project would receive a savings from the lower heat production costs. The hcat purchase saving is calculated as the total amount of purchased heat times the difference between the purchase prices "with" and "without" the project.
E. Sensitivity and Risk Analysis. A sensitivity analysis has been undertaken to test the robustness of the ERR of the project to changes in its key cost and benefit components, such as investment costs, fuel costs, willingness to pay, loss reduaction, energy savings due to the installation of substations, and operation and maintenance savings, all of which are subject to risk and uncertainty. The analysis shows that the proposed investments are attractive and robust, as only with significant increases in costs or large decreases in benefits would the ERR fall to levels below the opportunity cost of capital of about 10%. For example, more than a 30% increase in investment costs or more than a 250% increase in natural gas prices would be required for the ER1Rto fall below 10%. Also, willingness to pay benefits would need to decrease by more than 60% or energy conservation benefits would need to decline by more than 45% before the ERR would fall below 10%0.The project's economic indicators are not particularly sensitive to changes in operation and maintenance costs, loss reduction and other savings, or reliability benefits.
A risk analysis was also undertaken as projects in Latvia face a certain risks. Part of the risk is associated with the macroeconomic and political uncertainties facing all transition economies. Another part is specific to the project and these uncertainties are considered in the risk analysis. Risk analysis covers a number of possible uncertainties relaited to project delays, cost increases, lower avoided demand deficit, lower efficiencies, losses and operation and maintenance savings with the project, higher and lower tariffs and fuel prices, and lower reliability improvements. Risk analysis estimates the likelihood that the project risks would have an adverse effect on the economic indicators of the project.
In the risk analysis, different input variables, key parameters and assumptions of the cost benefit spreadsheet model are assigned probability distributions so that a weighted expected ENPV and ERR can be estimated. The software "Crystal Ball" was used to carry out the analysis. The software allowed the extension of the forecasting capability of the spreadsheet cost benefit model developed in Excel. Each input variable, parameter and assumption was expressed as a range of possible values within a probability distribution curve. Based on the specified risk distributions for each variable, the cost benefit model was subjected to a random Monte Carlo simulation with 5,000 trials, estimating the probability of occurrence of the project's ENPV and ERR.
The risk analysis indicates that the project has a probability of 65.3% of achieving the calculated outcomes (NPV = $24.8 million and ERR = 16.1%). On the other hand, with a 75% certainty the project outcomes are still attractive with an NPV = US$ 15.7 million and an ERR = 13.0%. The probability of obtaining an uneconomic rate of return below the 10% opportunity cost of capital for lIatvia is less than 8%. The main assumptions and parameters of the analysis, along with the risk distribution curve, are presented in the table below. 44 Forecast: ENPV
Summary: DisplayRange is from -50,000 to 125,000US$ million Entire Rangeis from -65,287 to 138,535US$ million After 5,000 Trials, the Std. Error of the Mean is 385
Statistics: Value Trials 5000 Mean 31,395 Median 32,335 StandardDeviation 27,196 Variance 739,625,494 Skewness -0.07 Kurtosis 2.84 Coeff. of Variability 0.87 RangeMinimum -65,287 RangeMaximum 138,535 RangeWidth 203,822 Mean Std. Error 384.61
ForecastENPV 1,000Trlals FrequencyChart 3 Outliers .036 38
.3 - . l- 27
3 01 . _8
0,000 4250 3,0 81,250 125,000 LIS$ 4illicn
45 Annex 5: Financial Summary for Rigas Siltums
Latvia: Riga DistrictHeating RehabilitationProject
Years EndingSeptember 30, 2000 through September30, 2005 ('000 Lats)
Income Statement Items Heat Sales (000's Gcal) 3,277 3,122 3,115 3,114 3,140 3,084 -1.0 Revenues 62,402 59,452 59,319 59,288 59,790 58,728 -1.0 Operating Income 7,019 6,970 7,186 8,296 13,430 12,463 10.0 Net Income 1,079 397 53 62 3,251 2,680 16.4
Funds StatementItems Internal Sources 7,019 6,970 7,186 8,296 13,430 12,463 10.1 Hire-Purchase Income - 743 1,976 3,165 4,237 6,206 52.9 Borrowings and Grants 5,840 10,061 14,502 10,490 8,872 - 12.4 Total Sources 12,859 17,774 23,664 21,950 26,538 16,702 4.5 Capital Expenditures 8,234 11,993 17,585 15,457 19,474 15,000 10.5 Working Capital Increase 3,574 3,477 791 463 (491) (4,009) - (Decrease) Debt Service 761 803 1,719 2,670 3,428 6,707 43.7 Taxes 1,434 2,167 2,779 2,399 3,509 893 -7.6 Total Applications 14,003 18,441 22,873 20,988 25,920 18,592 4.8
BalanceSheet Items Current Assets 10,103 12,707 14,279 15,703 18,467 16,546 8.6 Current Liabilities 4,229 4,022 4,012 4,012 6,647 8,658 12.7 Net Fixed Assets 44,778 45,608 52,773 57,025 60,112 66,999 6.9 Total Assets 58,690 68,254 82,556 92,861 107,620 109,139 10.9 Debt 6,164 15,537 29,796 40,040 45,740 40,516 36.9 Equity 48,297 48,694 48,747 48,809 52,060 54,740 2.1 Total Liabilities and 58,690 68,254 82,556 92,861 107,620 109,139 10.9 Equity
FinancialRatios Operating Income as a % of Revenue 11.2% 11.7% 12.1% 14.0% 22.5% 21.2% Net Income as a % of Revenue 1.7% 0.7% 0.1% 0.1% 5.4% 4.6% Return on Assets 2.4% 0.9% 0.1% 0.1% 5.4% 4.0% Debt Service Coverage Ratio 9.22 8.68 4.18 3.11 3.92 1.86 Current Ratio 2.39 3.16 3.56 3.91 2.78 1.91 Debt as % of Total 11% 24% 38% 45% 48% 46% Capitalization
46 Annex 6: Procurement and Disbursement Arrangements
Latvia: Riga District HeatingRehabilitation Project Procurement
1. Responsibility. Project implementation would require procurement of goods, works and consultant services. Rigas Siltums, the project's implementing agency, would be responsible for the overall project procurement activity, including compliance with procedures and timetables agreed with the Bank. Rigas Siltums' Project Management Organization (PMO) would carry out all Bank-financed procurement activity. A procurement team has been formed within the PMO and entrusted with primary responsibility of the project bidding process. The team reports to the PMO's technical manager who is coordinating the various activities involved in project implementation. The PMO's technical manager, who is a highly qualified operational officer, has worked effectively on procurement matters with Bank staff during project preparation.
2. Given Rigas Siltums' limited international procurement experience, an international consultant has been recruited to assist the procurement team. The consultant is being financed by the Swedish Government's aide agency, Sida, under the $ 2.4 million equivalent grant program proposed for the project's institutional support. A procurement workshop, including the PMO's procurement team and their consultant, would be organized with the Bank's support during project launch. The workshop would focus on the World Bank's procurement policy and procedures and their application to the procurement arrangements planned for the project.
3. Procurement Plan. A detailed procurement plan was prepared during project appraisal and revised during loan negotiations and includes the contract packaging, applicable procedures and timing schedule for the project, including the co-financed components. The plan would be updated periodically, every 12 months, with the necessary details, as they become available (including list of tenders issued; contracts under procurement, execution or completed, contracts to be procured in the upcoming calendar year; costs of ongoing and completed contracts; estimated costs for upcoming contracts; schedule of bidding; and particular methods of procurement).
4. Project Goods and Works. The proposed project would finance: (i) partial and complete consumer substations in buildings for system delivery optimization and efficiency improvement at a total cost of about US$ 66.4 million; (ii) sections of distribution and transmission pipes for system rehabilitation at a total cost of about US$ 31.3 million, (iii) interconnection of the right and left banks of the Daugava river including a pumping station at a total cost of about US$ 25.3 million; (iv) improvements at Imanta heat-only-boiler house for peak load and reserve plant and overall environmental improvement at a total cost of about US$4.4 million; and (v) elimination of inefficient small coal-fired boilers at a total cost of about US$ 3.4 million. The proposed World Bank loan of US$ 36.2 million equivalent would finance: (a) US$ 35.2 million of supply and installation of district heating pipes and the pumping station, (b) US$ 0.6 million of insulation materials and pipe fittings and (c) the front-end fee of US$ 0.4 million equivalent. The remaining project goods and works would be financed by: (a) the Swedish loan of US$ 26.6 million equivalent, (b) the commercial banks' loans of US$ 17.2 million equivalent, and (c) Riga City and the Rigas Siltums for the remaining expenditures.
5. Project Consultant Services. The proposed project would finance consulting services for procurement and implementation support (US$ 1.6 million), for evaluation of a two-tier tariff structure (US$0.5 million), for support for improving the effectiveness of the social assistance program (US$ 0.1 mnillion), and for an institutional strategy study for Rigas Siltums (US$ 0.2 million). Grants would be obtained from donors for the consultant services. Additional consultant services would be required to assist Rigas Siltums in system design for load optimization, environmental improvement and site implementation supervision management for an estimated cost of about US$ 4.3 million. These additional consultant services would be financed by Rigas Siltums.
47 6. Methodsfor Bank-Financed Procurement. Bank-financed procurement would be carried out in accordance with the provisions stipulated in the Loan and Project Agreements and the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in January 1995 and revised in January and August 1996, September 1997 and January 1999. The Bank's Standard Bidding Documents would be used for Bank-financed procurement. The project procurement arrangements are summarized in Table Al.
7. Methods for Non-Bank-Financed Procurement. Project procurement not financed by the Bank would be carried out in accordance with Latvian and the co-financiers' procurement rules and regulations. Procurement arrangements under pa]rallel financing would be the responsibility of the borrower and the co- lenders. These arrangements, including rules and regulations, were reviewed during project appraisal and found acceptable to the Bank.
8. Bank-Financed Procurement Procedures. International Competitive Bidding (ICB) would be used for goods and supply and installation contracts estimated to cost the equivalent of US$ 100,000 or more. ICB procedures would cover 98%b of Bank-financed goods and supply and installation contracts. International Shopping (IS) procedures, based on comparison of quotations obtained from at least three suppliers from two different countries, would be used for packages estimated to cost below the equivalent of US$ 100,000. The aggregate amount of contracts under IS procedures is equivalent to IJS$ 0.7 million.
9. Supply and Installafion Arrangements. District heating system rehabilitation and expansion programs are best realized through supply, installation and commissioning arrangements, which would be applied for a large part of the project procurement using the Bank's Standard Bidding Documents for the Supply and Installation of Plant and Equipment. This approach would be appropriate because: (a) for the supply and installation of consumer substations, pipelines and the pumping station, the cost of goods would represent a substantial part of the estimated contract value (about 60%); and (b) installation of district heating pipes and associated equipment often requires small design changes which can be best carried out by the supplier. District heating pipe replacement can be implemented only when heating is not required, from April to September. The procurement has therefore been divided into annual contracts reflecting the typical arrangements in district heating projects where the construction generally takes place only during summer time.
10. Procurement Review. Procurement documents for the Bank-financed components would be subject to the Bank's review. All ICB contracts (draft bidding documents, invitation to bid, evaluation reports, both for supply and installation and goods), would be subject to the Bank's prior review. Procurement documents for the project tenders under IS for goods (draft invitation to quote and evaluation report before contract is signed) would also be subject to Bank's prior review. The prior review would cover 100% of Bank-financed procurement value.
11. Advertising. A General Procurement Notice has been published in the United Nations Development Business newsletter in February 2000. The Notice would be updated annually for the remaining procurement. In addition, specific tenders would be advertised by the PMO, as they become available, in at least one national newspaper of large circulation. Furthermore, the PMO may also advertise some of the tenders in an international newspaper or a technical magazine. The PMO may also seek "expressions of interest" by contacting embassies and trade representatives. Notification should be given in sufficient time to enable prospective bidders to obtain bidding documents and prepare and submit their responses.
12. Risk Assessment. A Country Procurement Review (CPAR) for Latvia has not yet been carried out. A key aspect for defining the level of prior review has been the procurement capacity assessment of Rigas Siltums. The assessment involved company officials to complete data collection questionnaires about their own rules and regulations as well as the country's laws and regulations. Because of Rigas Siltums' concern for economy and efficiency, the company's management has been closely monitoring its procurement activity, making the company's tendering and contracting practices without apparent risk. However, problems associated with procurement are likely to occur, because of: (i) the company's lack of experience
48 in international procurement in general and Bank procurement in particular; (ii) the magnitude of procurement associated with the proposed project; (iii) the less-than-complete legal framework and enforcement mechanism now available in the country; and (iv) difficulties that are often imbedded in transitional economies. The overall procurement risk rating is therefore high.
13. Frequency of ProcurementSupervision Missions Proposed. It is recommended that the project's procurement be supervised at least once every 6 months. Additional procurement supervision mission would be required for post-reviews and audits. It is highly likely, therefore, that the amount of resources required for supervision of the Bank-financed procurement would be higher than the Bank-wide average.
14. Procurement Audit. In addition to prior reviews, the Bank may carry out an audit of the procurement it finances. Whereas the prior reviews are regular tasks under the project, procurement audit would be a spot check of the quality and consistency of Bank-financed procurement work.
Disbursements
15. Proceeds of the Loan will be disbursed according to allocated amounts and percentages per category of expenditure as indicated in the Table C below.
16. The Loan proceeds will be disbursed over the five-year period 2001-05. The Project Completion Date is expected to be December 31, 2004, and the Loan Closing Date is expected to be June 30, 2005, when full disbursement of the Loan is anticipated. Rigas Siltums would maintain all required supporting documentation for at least one year beyond the year in which the last withdrawal from the Loan Account has taken place and make it available for review by the Bank staff and independent auditors upon request.
17. A Special Account would be opened and managed by Rigas Siltums in accordance with World Bank operational policies. Rigas Siltums would support each application for withdrawal from the Loan Account through the submission of a Project Management Report (PMR). Upon receipt of each application for withdrawal of an amount of the Loan, the World Bank would deposit into the Special Account an amount equal to the lesser of: (a) the amount requested, or (b) the amount that the Bank has determined, based on the PMR accompanying the application for withdrawal, that is required to finance eligible expenditures during the upcoming three-month period. However, the amount to be deposited, when added to the balance of the Special Account, would not exceed 20% of the Loan amount, i.e., US$ 7 million equivalent. As circumstances warrant, direct payments may continue to be authorized. If utilized, withdrawal applications for direct payments should be at least US$ 0.5 million equivalent during the first two years of the Project and at least US$ 1.0 million equivalent thereafter.
49 Annex 6, Table A: Project Cost by Procurement Arrangements (US$ million)
Expenditure Category Procurement Method Total Cost ICB IS N.B.F. 1. Supply and 47.5 82.8 130.3 Installation (35.2) (35.2)
2. Goods 0.7 0.7 (0.6) (0.6)
3. Consultant Services 6.7 6.7
4. Front-end Fee (0.4)
Total 47.5 0.7 89.5 138.1 of which Bank (35.2) (0.6) _ (36.2)
N.B.F. = Not Bank-financed. Figures in parenthesis are the amounts to be financed by the Bank loan.
50 Annex 6, Table Al: Procurement Arrangements and Time Schedule
World Bank-Financed Procurement _ Contract Major ProcurementPackages & Years Of Category Estimated Cost Tender Invitation Bid Contract Contract Implementation of Proc. (US$ million) Preparation to Bid Opening Award Signing Completion Date Date Date Date Date Date
Total Bank- Financed
Supply & Installationof District Heating PrimaryNetworks 1) Year 2001 (16.5 km) 1 S & 1 7.4 5.5 ICB Sep-00 Nov-00 Jan-01 Mar-01 Mar-01 Nov-01 Nov-02 Year 2002 (31.3 km) S & I 13.1 9.7 ICB Sep-01 Nov-01 Jan-02 Mar-02 Mar-02 Year 2003 (42.7km+P.St.) 2 S & I 15.0 11.1 ICB Sep-02 Nov-02 Jan-03 Mar-03 Mar-03 Nov-03 Nov-04 Year 2004 (49.0km) 1 8.9 ICB Sep-03 Nov-03 Jan 04 Mar-04 Mar-04 Supply of Insulation Materials & Fittings Year 2002-2004 7 G 0.7 0.6 IS Total 12 48.2 35.8 I) Includespipes for eliminationof inefficient boilers
Commercial Bank(s)-Financed Procurement Supply& Installationof ConsumerSubstations 00 Mar. 00 Nov-00 Year 2000 I N.B.F 2.2 1.9 N.B.F. Sept.99 Nov. 99 Jan. 00 Mar. Mar. 01 Nov-01 Year 2001 1 N.B.F. 2.2 1.9 N.B.F. Sept. 00 Nov.00 Jan. 01 Mar. 01 Nov-02 Year 2002 I N.B.F. 2.4 2.0 N.B.F. Sept. 01 Nov. 01 Jan. 02 Mar. 02 Mar. 02 Subtotal 3 6.9 5.8 Network Rehabilitation, Secondary Year 2000 1 N.B.F. 2.9 2.5 N.B.F. Sept. 99 Nov. 99 Jan. 00 Mar. 00 Mar. 00 Nov-00 Year 2001 I N.B.F. 2.9 2.5 N.B.F. Sept. 00 Nov.00 Jan. 01 Mar. 01 Mar. 01 Nov-01 Year 2002 1 N.B.F. 3.1 2.7 N.B.F. Sept. 01 Nov. 01 Jan. 02 Mar. 02 Mar.02 Nov-02 Subtotal 3 9.0 7.7 ProductionPlant Rehabilitation Year 2000-2001 1 N.B.F. 4.4 3.7 N.B.F. Sept. 00 Nov. 00 Jan. 01 Mar. 01 Mar. 01 Nov-01 Total 7 20.3 17.2
_ _ _ _ I _ _ _ _ _ I1 _ _ _ _ il_ _ _ Il______I
51 Annex 6, Table Al: Procurement Arrangements and Time Schedule cont.
SwedishLoan-Financed Procurement Major Procurement Packages Category EstimatedCost Tender Invitation Bid Contract Contract Contract & Years Of Implementation of Proc. (US$ million) Preparation to Bid Opening Award Signing Completion Date Date Date Date Date Date Supply & Installationof Substations
Year 2000 I N.B.F. 4.2 3.6 N.B.F. Sep-99 Nov-99 Jan-00 Mar-00 Mar-00 Nov-00 Year 2001 I N.B.F. 6.6 5.6 N.B.F. Aug-00 Nov-00 Jan-01 Mar-01 Mar-01 Nov-01 Year 2002 1 NSB.F. 6.6 5.6 N.B.F. Aug-01 Nov-01 Jan-02 Mar-02 Mar-02 Nov-02 Year 2003 1 N.B.F. 6.6 5.6 N.B.F. Aug-02 Nov-02 Jan-03 Mar-03 Mar-03 Nov-03 Year 2004 1 N.B.F. 7.4 6.2 N.B.F. Aug-03 Nov-03 Jan-04 Mar-04 Mar-04 Nov-04 Total 5 31.4 26.6
Grant-FinancedProcurement InstitutionalSupport _
Sida 1 N.B.F. 2.1 2.1 N.B.F.
Others 3 N.B.F. 0.3 0.3 N.B.F.
Total 4 2.4 2.4
a Ci-Financed Procurement Supply & Installationof 300 Substations
Year 1999 (90) 1 N.B.F. 1.6 1.6 N.B.F. Oct. 98 Dec.98 Feb.99 Jun.99 Jun.99 Oct. 99 Year 2000-02 (210) 3 N.B.F. 3.6 3.6 N.B.F. Total 4 5.2 5.2 |
IRi as Siltums-Financed Procurement | Consumer Substations g
Share of remaining works and N.A. N.B.F. 19.5 N.B.F. | rernainingother amounts _
| Design& Site Managernent j l l l l ll l 1 Year 2000-2004 N.A. N.B.F. 3.7 N.B.F. Other Items 7.5 N.B.F.
Subtotal, net of Taxes 30.7 Taxes 19.8 N.B.F.
Grand Total 32 137.6 S & 1: Supply and Install; G: Goods (Supply of Goods); I.S.: International Shopping; N.B.F.: Not Bank Financed; N.A.: Not Applicable
52 Annex 6. Table B: Thresholds for Procurement Methods and Prior Review
Section1: ProcurementReview Goodsand Works ICB IS Thresholds: Individual Goods 2 $100,000 Goods <$100,000 & aggregate All Supply and Install AEreg. $700,000 Prior Review All All
Section2: Capacityof the ImplementingAgency in Procurementand TechnicalAssistance Requirement Review of the implementationagency to conductprocurement has been assessed.As a result, the followingaction plan is being implemented: irement specialist(PS) has been hired to assist the agency in implementingprocurement activities for the project. The PS has familiaritywith World bank id practices. The PS has been hired prior to the project launch workshop. Also, prior to the loan negotiations,the Project ManagementOrganization (PNl id the procurementteam membersand their technicalmanager appointed. Prior to appointmentof the PS, the PMO, the procurementteam and the technicalman; vith Bankprocurement procedures and practicesso that they can initiatethe project procurementas early as possible. er familiarization,through seminarsand workshops,of the project implementationagency's procurementstaff with Bank's procurementprocedures and practi( early as possibleduring project launch. The procurementseminars and workshopsshould also include the preparationof bidding documentsfor each type of followedunder the project. urementtechnical manager and selectedprocurement team membersshould attend Bank sponsoredtraining courses in Turin. urementAssessment Report or CountryProcurement Strategy Paper status: Were the bidding documents for the procurement actions of the first ye t been made. negotiations:Yes
Section3: Training,Information and Develo menton Procurement te of Project Launch Date of publication of General Indicate if there is procurement DomesticPreference for Goods: DomesticPreference ovember2000 Procurement Notice: subject to mandatory SPN in No applicable: NIA e 2Februare2000 DevelopmentBusiness: Yes nancing:No -- Explain: Advanceprocurement: No -- Explain: ly the ProcurementMonitoring System: A procurementmonitoring system will be establishedwithin the PMO which will collect and keep up to-date all procd thisdata in progressreports to the Bank. Explainbriefly the procurementarrangements under co-financing:Swedish loan: Sida's proceduresbased on EU rules for publicutilities
Section4: ProcurementStaffmg of ProcurementStaff or Bank's staff part of Task Teamresponsible for the procurementin the Project: Name: HannachiMorsli, PAS, Ext: 82873 y the expectedrole of the FieldOffice in procurement: Limitedliaison role only.
ICB: IntemationalCompetitive Bidding; IS: IntemationalShopping
53 Annex 6, Table C: Allocation of Loan Proceeds
ExpenditureCategory Amountin Amount in FinancingPercentage US$ million EUR million
A. Supply and Installation 20.36 14.10 100% of foreign expenditures and Contracts 80% of local expenditures
B. Goods 0.62 100% of foreign expenditures, 100% of ex-factory expenditures or 80% of other local expenditures
C. Front-End Fee 0.22 0.16 100% of amount due
Subtotal 20.58 14.88 Unallocated 1.08 0.78 Total 21.66 15.66 _-
54 Annex 7: Project Processing Schedule
Latvia: Riga DistrictHeating RehabilitationProject
Time takento preparethe project (months) NA 25 months First Bankmission (identification) 5/13-21/1997 5/13-21/1997 Appraisalmission departure 6/1999 6/28/1999 Negotiations 10/1999 6/1-9/2000 Planned Date of Effectiveness 12/2000
Prepared by: Rigas Siltums with the support of a Steering Committee including representatives of Riga City Council, Latvenergo, Latvian Privatization Agency, Ministry of Economy, Energy Regulatory Board and the Swedish Government's Aid Agency, Sida,
Preparation assistance: Bilateral Aid from the Swedish Government with consultancy assistance provided by Fjarrvarmebyran together with Stockholm Energi's consulting arm, Teknik & Miljo (Sweden) and Coopers & Lybrand (Latvia)
Bank staff who worked on the project included:
Carolyn Gochenourgram Team Leader Pentti Aro District Heating Engineer Luis E. Gutierrez Energy Econonmist Enar Wennerstrom Financial Analyst/Financial Management Anna Bjerde Financial Analyst Roberto Tarallo Financial Management Specialist Hannach Morsli Procurement Accredited Specialist Dina Grube Energy Specialist Eugen Finkel Social Scientist
55 Annex 8: Documents in the Project File*
Latvia: Riga District HeatingRehabilitation Project
A. Project ImplementationPlan
Project Implementation Plan for Rigas Siltums
B. Bank Staff Assessments
Rigas Siltums' Financial Analysis Project Economic, Risk and Distributive Analyses Procurement Implementation Capacity Assessment Rigas Siltums' Financial Management Review
C. Other
Riga District Heating Rehabilitation Project, Phase 1, Final Report, Fjarrvarmebyran AB, December 21, 1998, including Environmental Irnpact Review, Section 6 Riga District Heating Rehabilitation Project, Phase 2, Final Report, Fjarrvarmebyran AB, March 15, 1999 Riga District Heating Rehabilitation Project, Phase 3, Final Report, Fjaarvarmebyran AB, June 30, 1999
*Including electronic files.
56 Annex 9: Social Assessment
Latvia: Riga District Heating RehabilitationProject
I. BACKGROUND
1 During project preparation, a social assessment was carried out in Riga to obtain feedback from households on a series of issues related to the provision of heat and hot water. First, the assessment was based on qualitative research using structured in-depth interviews and focus group discussions with residential district heat customers as well as consultations with staff from Riga Siltums, City representatives, housing maintenance organizations, municipal social assistance offices and civil society stakeholders. Second, the assessment was based on quantitative research by means of a questionnaire-based household survey administered to 500 randomly-selected residential district heating and hot water customers. In addition, a supplementary survey was carried out administered to 120 randomly- selected beneficiaries of Riga City's allowance program for housing and utility services providing support to low-income households.
2 The issues addressed in detail in the assessment are: (i) quality and reliability of the provision of heat and hot water, (ii) level of satisfaction and hardships due to insufficient provision of heat and hot water, (iii) patterns of supplementary heating and other coping strategies, (iv) physical conditions of heat and hot water installations, (v) metering and conservation of heat and hot water, (vi) household budgets and expenditures for heat and hot water by different income groups, (vii) collections, cost recovery, and indebtedness, (viii) poverty of residential customers based on detailed data regarding household incomes and expenditures, (ix) affordability, willingness to pay, price-elasticity of demand, and (x) effectiveness of the social assistance in place.
3 The assessment provided inputs for project design and justification. Specifically, the assessment clarified what level of heating comfort (degrees Celsius of indoor temperature) residential customers would like to have in winter and what they are willing to pay for the desired level of comfort. Similarly, the assessment analyzed what level of hot water comfort (in terms of consumption levels and quality of service provision) residential customers would like to have and what they would be willing to pay for the desired level of comfort. In addition, the assessment provided inputs into the economic analysis of the project as well as insights into financial, fiscal and institutional issues related to cost recovery from residential customers. Finally, the assessment is suggesting measures to improve the effectiveness of the allowance program to support low-income households. The detailed results of the social assessment are provided below.
II. GENERALINFORMATION
4 In Riga, residential district heating and hot water customers are largely identical with the city's population living in apartment buildings. This population comprises about 90% of Riga's inhabitants. On average, households have 2.6 members, including 0.4 children below 15 years of age. More than 97% of these households live in separate apartments, a few households live in communal apartments and some individuals in dormitories. On average, households have 2.6 rooms. The size of the apartment amounts to 51 square meters, on average. 99% of the households are connected to the power network, 94% have cold water and sewerage, 90% have network gas for cooking, 90% have central garbage collection, 87% have telephone, 47% have cable TV and 4% have network gas for heating. 35% of the apartments are privatized, 31% belong to the municipality, 21% are property of the state and 13% of the flats are rented from private landlords.
57 III. DISTRICT HEATING
Overview
5 Residential customers are relatively satisfied with the quality of district heating provided by Riga Siltums, and complaints are moderate. While reporting a temperature of 18.3 degrees Celcius, on average, in their flats, households consider 20.05 degrees as ideal room temperature. Service interruptions account for only about 1% of heating time citywide. For supplementary heating, residential customers primarily use electric heaters, however, household expenditures for supplementary heating are rather low. Heat losses due to opening windows are small. Households conserve heat primarily by applying weatherstripping of windows and doors. Many households would like to have heat regulators and heat meters both at the building level and in their flats. They believe this would reduce heat consumption and heat bills. The overwhelming majority of respondents are not willing to pay more if the room temperature in their flats would be increased. 36% of the respondents would like to reduce the average room temperature if this reduction would also lead to a lower heating bill.
Room temperature
6 During the past heating season residential customers had an average temperature of 18.3 degrees Celcius in their flats and consider 20.05 degrees as ideal room temperature.
Too hot
7 12% of the respondents reported that it was too hot in their flats. C'hart 1 below shows for how long it was too hot in the flats according to estimates of residents.
Chart 1: Too hot in the apartment,duration
,vire thansix mrDnths Fourto six mronths Threeto four rmnths 8.6% Two to threerrDnths 15.5% Cneto tw o rmDnths Onevw eek to onermDnth Onew eekor less
8 When it was too hot, the temperature was 22.73 degrees, on average. The highest temperature reached, on average, was 24.47 degrees.
Too cold
9 37% of the respondents reported that it was too cold in their flats. Chart 2 below shows for how long it was too cold in the flats according to estimates of residents.
58 Chart 2: Too cold inthe apartment,duration
I tbre thansix rrnnths 3 8% Fourto six rmDnths Threeto four rnDnths 8.70 Two to threermnths 16.3% Oneto tw o nunths Onew eekto onermDnth Onew eekor less
10 When it was too cold, the temperature was 15.07 degrees, on average. The lowest temperature reached, on average, was 13.09 degrees.
Heating interruptions
11 Complaints regarding heating interruptions were moderate. Almost 60% of the respondents reported no heating interruptions at all. Chart 3 below shows the percentage distribution of different numbers of interruptions registered by residential customers. Service interruptions during the last heating season account for only about 1% of heating time. Chart 4 shows the extent to which residents estimate that heating interruptions due to maintenace were publicly announced or not.
Chart3: Interruptionsregistered by customers
Never Once 10.6% Twice 11.7% Threetirmes E j 10.8% Fourtirres 7.3%
Chart4: Interruptions due to maintenanceare announced
Always or rmstly Frequently Sorretirres Rarelyor never don'tknow
59 Supplementing heat
12 For supplementary heating, residential customers primarily use electric heaters. Some customers also use gas-fired cooling ranges as well as wood or coal fired heaters. Nevertheless, household expenditures for supplernentary heating are low, amounting to only 2.4% of what households spend for district heating. Chart 5 shows the extent to which households use different heating equipment for supplementary space heating.
24.6% Chart5: Heating equipment used for supplementaryheating
10.8%
5% U_____5%0.8% 0.8% ~~ - Bectric Gascooking Wood/coal Bectric Gasheaters heaters ranges heaters cooking ranges
Opening windows
13 Opening of windovvs was not deviant from reasonable norms and was mainly done to get fresh air. Thus heat losses due to opening windows are marginal. Chart 6 shows how often residential district heat customers usually open windows in their apartment, Chart 7 shows for what reasons they open the windows, and Chart 8 shows for how long customers left the windows open, on average.
Chart6: Frequencyof openingwindows
Never
A few tirres perweek
Once a day 33.6-/o1
Severaltins a day
Always
Chart7: Reasonsfor openingwindows
13ecauseitis toohot 3.2%
To getfresh air
Both L 9.7% Don'tknow 11.8%
60 Conserving heat
14 As key measures of conserving heat, households in Riga apply weatherstripping of windows (80.7%) and doors (57.6%). In addition, people close curtains in the night to keep their flats warmer. 24.8% of the households do this always, 33.5% only when it is very cold and 41.2% of the residents never. 55.7% of the households even lift the curtains when they are closed and cover the wall radiators in order to get as much heat as possible. Only a few households (6%) replaced windows in order to make their flats tighter and put reflecting foil behind their wall radiators (3.4%) in order to better use
Chart8: Durationof openingwindows
Fiveminutes or less _N r
Fiveto ten minutes
fvbrethan ten minutes 18.4°
Don'tknow 13% the heat provided.
Radiators
15 The most important problem regarding radiators is the problem that some radiators in the flats are not getting as hot as the others. 26% of respondents reported this problem. Only 5% of respondents reported that radiators are leaking, not more than 6% of the households replaced original wall radiators with more effective ones, and 10% of the households would like to replace, or are going to replace, original wall radiators with more effective ones.
Metering heat
16 Meterin! heat at the building level. 70% of the respondents have a heat meter in their building (10% don't have, 20% don't know). 81.3% of those households who don't have a meter would like to have one, most likely, because most of these households (77%) believe that the installations of heat meters will, in the end, result in lower heat bills.
17 Metering heat at the apartment level. 82.2% of the households surveyed would like to have heat regulators and heat meters in their flats. Most of these households think they would consume less heat if they had regulators and meters at the flat level (69.3%). They also believe that these regulators and meters would lead to lower heat bills (77.6%). Chart 9 shows how much heat households opting for regulators and meters would expect to save if they had these regulators and meters in their flats.
Chart 9: Expectedheat savings
Nothing 5.4%
Upto onef ourthof currentconsunption
Onefourth to one halfof currentconsunption 21.9%h
lvbrethan one half of currentconsumption 6.3%
Don'tknow Getting disconnected
18 To further explore satisfaction or dissatisfaction of residential customers with district heating, these customers were asked if they ever considered to get disconnected from the heating network. The survey results showed that 22.4% of them did consider getting disconnected from the network. A large number of these households (83.9%) considered getting disconnected because they think they cannot afford district heating services. Also, concerns regarding the quality of heating, to some extent, motivated residential customers to consider getting disconnected, in particular, the concern that nobody regulates the temperature according to the outside temperature (62.5%) as well as the concern that the heating season starts too late (65.2%) and ends too early (56.3%). However, other quality concerns hardly motivated customers to consider getting disconnected, including too low (37.5%) or too high (11.6%) room temperatures in the flats or service interruptions due to maintenance (18.8%) and emergency factors (8%).
19 Surprisingly, more than half of the households (52.7%) considered getting disconnected from the district heating network because they thought heating with electric heaters was cheaper. 27.7% thought heating with wood or coa]-fired stoves was cheaper, whereas 25.9% thought heating with gas- fired heaters was cheaper. Provided that they would really request getting cut off and in fact get disconnected from the district heairing network, 71.2% of households would heat with electric heaters, 26.8% would heat with gas-fired heaters while 19.8% would heat with wood or coal fired stoves.
Public education and the dissemination of information on alternative options for space heating
20 The fact that many of those households who considered getting disconnected from the district heating network (i) believe that heating with electric heaters is cheaper than district heating and (ii) an even larger number of these households would indeed heat with electric heaters if they would really get disconnected from the heating network calls for public education and the dissemination of information on comparative costs of space heating options. Above all, poor families need to know which is the cheapest form of space heating at home. In particular, households need to know if, or under which conditions, it is convenient to get disconnected from the heating network and use gas-fired or electric space heaters in each room at horne, or install mini-boilers at the apartment level or at the level of a building or detached house. Also, those households whose homes are located out of reach of the district heating network need advice on the most cost-effective choice of space heating. Riga City, in close coordination with Riga Siltums, should provide information to Riga's households regarding different heating options for different categories of residential customers.
Willingness to pay for heat
21 Willing to pay more for increased heat. 3.8% of the population would be willing to pay more if the room temperature in their flats would be increased. A mere 2.2% of the households surveyed would be willing to pay more if the room temperature would be increased to 21 degrees. On average, these individuals would be willing to pay 11.36 % more of their current heat bill in order to obtain a room temperature of 21 degrees. The most important reason for households to pay more is their wish to have sufficient room temperature always (100% of respondents). Relevant for the willingness of 78.9% of the households to pay more is the fact that they would have more money for district heating if they would have to spend less for supplementary heating. Also, 57.9% of the households are willing to pay more just because they can afford it.
22 Not willing to Pay more for increased heat. The overwhelming majority of respondents (96.8%) are not willing to pay more if the room temperature in their flats would be increased. The most important reasons for this refusal to pay more are listed in Chart 10 below. Remarkable is that the following statements were clearly rejected as indicators for factors influencing the willingness of residents to pay more: "nothing happens if we do not pay" (68.9%) and "the state or private employer do
62 not pay salaries on time" (63.9%).
Chart 10:Reasons for not willingto paymore Rga Siftumsis overcharging - Cannotafford paying nore State shouWpay partof thecharges for heat 69.1% Theyw ill not irrproveservice 57.4% Qualityof presentservice is not bad
Reducingroom temperaturein order to pay less
23 36% of the respondents would like to reduce the average room temperature if this reduction would also lead to a lower heating bill. On average, they would you like to reduce the room temperature to 16.78 degrees. For this lower room temperature, they would you like to reduce their heat bills by almost 29.64%. Reducing the room temperature from 18 °C to 17 °C would actually save some 3% of the costs of the provision of heat.
Price-elasticityof householddemand for district heating
24 In order to assess the demand sensitivity of households in response to tariff increases for district heating, households of the supplementary survey were asked to what extent they would like to reduce their room temperatures if tariffs would increase 10, 20, 30 and 50%. Based on the data obtained from these questions, the price-elasticity of demand for district heating was calculated. The result of this exercise showed that the household response to tariff increases is relatively inelastic. Elasticities obtained fall in the range of 21-27%. Details are shown in Table 1 below. The table also shows how the share of households which would not reduce their demand for district heating would decline as .ariffs increase.
Table 1: Price-elasticitiesof demand at increases of the districtheating tariff by 10, 20, 30 and 50 percent. Share of Householdsnot reducingdemand in reaction to tariff increases.
District heating tariff Price-elasticities of demand Percentage of households not increasing for district heating reducing demand in reaction to by increases of the district heating tariff 10 percent -27 71.8 20 percent -26 50.9 30 percent -27 30.6 50 percent -21 25.7
63 IV. HOT WATER
Overview
25 Residential customers are relatively satisfied with the quality of hot water services provided by Riga Siltums, and complaintsare moderate. Willingnessto pay more for improvedhot water services is scarce. Hot water consumptiondrops dramatically after the installation of hot water meters, however, many householdcannot afford buyingmeters. 18% of householdsdon't have hot water services in connection with district heating; the majority of these households are not interested in getting connectedto the hot water network. Many of these householdsmistakenly believe that heating water with electric equipmentis cheaper than hot water services providedin connectionwith district heating.
Oualitv of hot water
26 Householdscomplain that it takes too long until water becomes hot after openingthe hot water tap. Chart 11 shows how lonlgit takes according to the surveyed householdsuntil hot water comes out of the tap.
Chart 11: Hot water comes out of the tap hyrediatety
After a minute 3%
Afterone to five mfinutes 30%
After rrnrethan five minutes 1 0 116% After morethan ten rrinutes % Thoughconnected, don't lIave hot water at all ||1%
27 40% of householdshave problems with hot water pressure. Also for 40% of respondents, hot water is often dirty, and contains rust or other particles; for 48% of respondents hot water is sometimesdirty, and containsrust or other particles.
28 For 56% of respondents,hot water did not always have the temperature desired. Above all, water was too cold. Chart 12 shows the extent to which householdsconsidered water to be too cold. The extent to which householdthought that water was too hot is moderate: for 35% of respondentswater was sometimestoo hot, for 58%, rarely or never.
Cliart12: Water is toocold
always or mostly 19.5
frequently 5.5
sometimes | 31.6 rarelyor never ] 3.5
64 Hot water interruptions
29 Respondents reported hot water interruptions due to both emergency repairs (64%) and maintenance (77%). For emergency repairs, they had, on average, 3.14 interruptions, lasting 17.61 days. For maintenance works, they reported, on average, 1.92 interruptions, lasting 17.61 days. 54% of the respondents reported that, in case of maintenance, hot water cuts were always or mostly previously announced.
Hot water pipes and taps
30 Interviewees indicate that they have problems with hot water pipes. 24% of respondents state that hot water pipes in their flats are getting clogged. 48% of surveyed households report that hot water pipes had gotten clogged in their buildings. 52% of households report that they had hot water pipe breaks in their buildings. Not surprisingly, 55% of respondents believe that it would be necessary to replace part of the hot water pipes in their building; 38% believe that it would be necessary to replace all hot water pipes. According to 10% of households, hot water pipes are leaking, whereas taps are leaking in 14% of the cases.
Willingness to pay for hot water
31 About 12% of the population would be willing to pay more if the quality of hot water would be very much improved (always ideal temperature; immediately hot water when opening tap; no dirt, rust or other particles; no interruptions). On average, these people would be willing to pay more by approximately 14% of the amount of money they currently pay per month for hot water. Key reasons for the willingness of households to pay more, including the frequencies at which households agreed with these reasons, are listed in Chart 13, below:
Chart 13: Reasonsforwilling to pay more
No dirt,rust or other particles in water
Alwaysideal temperature
Immediatelyhot water when opening tap 76%
No interruptions 67%
32 52% of the households willing to pay more disagreed with the statement that cost is not a problem for them; 29% agreed with this statement and 19% were undecided.
Not wilIine to pay more for hot water
33 88 % of the population is not willing to pay more, although the quality of hot water would be very much improved. Key reasons for the lack of willingness of these households to pay more, including the frequencies at which households agreed with these reasons, are listed in Chart 14, below:
65 Chart 14: Reasons of households for not willing to pay more Cannctafford paying more - Riga Siltjms is overcharging
RigaSiltums will not improve serce 169%
State should pay part of the charges 3 66
34 72% of the households not willing to pay more disagreed with the statement that nothing would happen if they do not pay, and 68% disagreed with the statement that the state or private employers do not pay salaries on time.
Metering and conserving hot water
35 Households with hot water meters. 65 % of the respondent households have a hot water meter. The vast majority (94.4%) of those who have a hot water meter reported that their hot water bill decreased after having installed a hot water meter. Also, 50.9% of the households with metered hot water service stated that they consumed less after having installed a hot water meter, whereas 46.5% of them reported that the installation of a hot water meter did not alter the level of hot water consumption. In order to consume less hot water, households with metered service applied a series of measures shown in Chart 15, below:
Chart 15: Provisions to consume less hot water undertaken by households with hot water meters Closetaps inr diately,no morerunning taps
RepairirnTediately leakage of hot water taps and pipes
Take show er insteadof bath in bath tub I O 0%
Rinse dishes with coldw ater 52 %
Donot wash dishes under runninghot water _ 0%
Use bw-f low shower-heads 115%
Take show er at relatives/friendsw ho donl have neter 8%
36 Households without hot water meters. 35% of the respondent households don't have a hot water meter. 86% of them would like to have a hot water meter, while 91.1% believe hot water meters would decrease their hot water bills. A large majority of the households (78%) who would like to have a hot water meter express that they cannot afford to buy the number of hot water meters they need for their flat.
66 Reducing hot water consumption and hot water bill
37 If they had metered hot water, 46% of the respondents without hot water meters would consume less hot water in order to reduce their hot water bill. However, 34% of them would not consume less. The extent to which the former are willing to apply measures to save hot water is shown in Chart 16 below:
Chart 16: Measuresto consumeless hot water envisionedby households without hot water meters Closetaps irmediately,no rrorerunning taps _. RepairimTnediately leakage of hotw ater taps andpipes Donot w ash dishes underrunning hot w ater 590/% Takeshower insteadof bathin bathtub 55% Rnse disheswith cold water 44% Use low-f low show er-heads 0% Takeshow er at relatives/friends w ho don'thave neter _ 5%
38 Households lacking metered hot water service seem to be willing to apply measures to save hot water to a larger extent than those households who already have metered service. On average, households without hot water meters would be able to reduce their current hot water consumption by 29% in order to lower their hot water bill. For this lower hot water consumption, they would like to reduce their current hot water bill by 39%.
Households without hot water in connection with district heating
39 18% of residential district heating customers do not have hot water provided in connection with district heating.
40 Opting for connections to the hot water network. Of those households who don't have centrally provided hot water, 22% would like to have centrally provided hot water. Currently, most of them (63%) heat with gas- fired cooking ranges, 21% heat with electric water heaters and 16% heat with gas-fired water heaters.
41 Not interested in hot water connections. Surprisingly, a large number (78%) of those households who don't have centrally provided hot water are not interested in getting connected to the hot water network.
42 Disconnected from the network on request. A little more than half (53%) of the households not interested in connections to the hot water network are households who had centrally provided hot water earlier, but requested to get disconnected and now don't like to have centrally provided hot water services anymore. The majority of these households (63%) heat with gas-fired cooking ranges and 37% of them heat with electric water heaters. Practically none of this group of households heats with gas-fired water heaters.
43 Remarkably, one third of the households that heat with gas-fired cooking ranges believe that heating water with electric water heaters is cheaper than centrally provided hot water services, although electricity, in fact, is the most expensive household fuel available. Thus, altogether, 56% of the households who got disconnected from the hot water network on request believe that heating water with electric water heaters is cheaper than centrally provided hot water. 67 44 Not surprisingly, almost all (88%) of the households disconnected from the hot water service on request don't want to have this service, because they think they cannot afford it. In addition, key service deficiencies prevent these households from giving preference to centrally provided hot water service. These deficiencies, including the frequencies by which households mentioned them, are shown in Chart 17 below.
Chart17: Hot water deficienciesobserved by householdscut off from serviceon request Ittakes too long until hot w ater cones out of thetap - Often,water is dirty, contains rust or otherparticles
Wateris often too cod 790/l
Frequentinterruptions due to maintenance 79%
Thehot water stream out of thetap isthin (w eak)
Emergencyinterruptions such aspipe breaks
45 Other households not interested in network connections. About 55% of the remaining households that are not interested in connections to the hot water network heat water with gas-fired water heaters, 26% of these households heat with electric water heaters and 19% heat with gas-fired cooking ranges. This group of households doesn't want to have centrally provided hot water, primarily because they think they cannot afford it (71%o). Also, the perception that water is often too cold (65%) prevents these households from opting for centrally provided hot water. Furthermore, service interruptions due to maintenance (45%). the observation that it takes too long for hot water to come out of the tap (45%), as well as concerns about emergency interruptions such as by pipe breaks etc. (32%) contribute to the same result.
Lack of affordability and deficiencies of service iuality
46 The emphasis that households put on their inability to afford centrally provided hot water, strongly linked to the weight that these households put on shortcomings inherent in hot water service quality, suggests that lack of affordability only results in disconnection from the hot water network if this is aggravated by strongly observed deficiencies of service quality.
Public education and dissemninationof information on alternative options for heating water
47 The fact that many of those households who don't want to have centrally provided hot water due to lack of affordability, heat water with electric water heaters, or consider the use of electric water heaters cheaper than centrally provided hot water services, calls for public education and the dissemination of information on comparative costs of household fuels for heating water. Above all, poor families need to know which is the cheapest form of heating water at home. In particular, these families need to know if or under which conditions it is convenient to get disconnected from the municipal hot water service and use gas-fired water heaters or ga-fired cooking ranges for heating water. In addition, those households whose homes are located out of reach of the district heating and hot water network may need advice on the most convenient form of obtaining hot water. Riga City, in close coordination with Riga Siltums, should provide information to Riga's households regarding different hot water options for different categories of residential customers.
68 GettinBdisconnected
48 To further explore satisfaction or dissatisfactionof residential customers with centrally provided hot water services,households were asked if they ever considered getting disconnectedfrom the hot water network. The survey results showed that 15% did consider getting disconnected from the network. The reasons for this considerationstrongly resemble the reasons for which householdswithout municipal hot water services don't like these services or got disconnectedfrom the hot water network. First, a large number of these households (80.6%) considered getting disconnected because they think they cannot afford municipal hot water services. Second, these affordability concerns are clearly correlated with concerns regarding the quality of centrally provided hot water services, however, to a lower degree than in the case of households who in effect got disconnected on their request. These quality concerns, includingthe frequenciesby which householdsmentioned them, are shown in Chart 18 below. Third, practically the same share of households as in the case of the group of households disconnectedform the hot water network, namely 56.6%, believe that the use of electric water heaters is cheaper than centrallyprovided hot water services.
Chart 18:Hot water deficienciesobserved by householdsconsidering disconnectionfrom the network
Wateris oftentoo cold Frequentinterruptions due to rraintenance 60% Often,w ateris dirty,contains rust or otherparticbLs 57% t takestoo longuntil hot w aterconres out of thetap 55%
Price-elasticityof householddemand for hot water
49 In order to assess the demand sensitivityof households in response to tariff increases for hot water, households of the supplementarysurvey were asked to what extent they would like to reduce their hot water consumption if tariffs would increase 10, 20, 30 and 50%. Based on the data obtained from these questions, the price-elasticity of demand for hot water was calculated. The result of this exercise showed that the household response to increases of the hot water tariff is moderately elastic - clearly more elastic that the relativelyinelastic response of householdsto increasesof the district heating tariff. Elasticities obtained fall in the range of 46-63%. Details are shown in Table 2 below. The table also shows how the share of households which would not reduce their demand for hot water would decline as tariffs increase.
Table 2: Price-elasticitiesof demand at increasesof the hot water tariff by 10, 20, 30 and 50 percent. Share of Householdsnot reducingdemand in reactionto tariff increases.
Hot water tariff increasing Price-elasticitiesof demand Percentageof householdsnot by for hot water reducing demand in reaction to increases of the hot water tariff 10 percent -46 68.3 20 percent -50 41.0 30 percent -63 21.0 50 percent -63 17.3
69 V. PAYING FOR HOUSING AND COMMUNAL SERVICES
Overview
50 Residentialcustomers mostly pay their heating and hot water bills in offices of municipal housing maintenanceorganizations. A large majorityof householdsindicates that the offices where they pay have inconvenientworking hours. 28% of householdsowe for heating and 18.5%owe for hot water. Households owing for heat and hot water are not predominantelypoor. The majority of debtor households owes relatively small amounts of money for heat and hot water. However, these debts accountonly for small sharesof total householddebts for both heat or hot water. The debts of a relatively smnallnumber of heavily indebted householdsaccount for large shares of total household debts for heat and hot water. Also, these debtors are not predominantelypoor. A strategy of enforcing cost recovery from householdsowing for heat and hot water should, in the first instance, target this small number of heavilyindebted households.
Pavingbills
51 Households mostly pay their heating and hot water bills in offices of municipal housing maintenanceorganizations (78%). Someof them pay in bank offices (10%). For most households(66%), the offices where they pay are not far away from the places where they live or work. Rarely or never, 54% of the households have to wait long for paying heating and hot water bills, with 36% of the householdshaving to wait sometimes. However, 80% of the householdsinterviewed indicate that the offices where they pay charges for heatingand hot water bills have inconvenientworking hours. Clearly, the majorityof households(77%) would you like to pay for heatingeach month during the heatingseason only, whereas17% would like to pay charges for heat each monthduring the whole year. The remaining householdsare undecided.
Indebtedness
52 28% of the households owe for heating. They owe on average 131 Ls, which is approximately6 monthly payments. 18.5% of the householdsowe for hot water. They owe on average 102 Ls, which is approximately13 mronthlypayments. Householdsowing for heat and hot water are not predominantelypoor. They are distributedrather evenly across all expenditurecategories of households. On the other hand, there are a number of indebted households (10%) who would be eligible for social assistancebut, in fact, do not receive any (50% of them fall in expenditurequintile 1, 77% in expenditure quintiles 1 and 2; see sectionon householdbudgets, below).
Reasonsfor vavine late heat or hot water charges
53 The major reason for paying late are shown in Chart 19 below.
Chart19: Major reasons for payinglate heatand hot watercharges
Chargesare notaffordable
Chargesexceed the applicable cost 80%
Statehas to paypart of the charges| 67%
70 54 Clearly rejected as accurate reasons for paying late were the assumptions that private employers do not pay salaries on time (63%), state agencies do not pay salaries on time (61%), and nothing would happen if residents do not pay (61%).
Repaving debts
55 26% of the households have an arrangement for repaying heat and hot water debts. In most of the cases, these arrangements have been signed with housing maintenance organizations. On average, households agreed on paying back all accumulated debts within 3 months.
Indebtednessand enforcementof cost recovery
56 A detailed analysis of the frequency distributions of household debts for heat and hot water provides interesting inputs for the development of a suitable strategy for enforcing cost recovery from householdsowing for heat and hot water. Charts 20 and 21 below show the frequency distributions of householddebts for heat and hot water.
Chart20 - Frequencydistribution of household debts, Lats
>20- C.,
" 0*
I = Std. Dev=120.34 Mean= 120.2 0.a N = 127.00 .o~ ~~ %27k9oo ko u?o to ?o 8%0 Householddebts, Lats
71 Chart 21 - Frequencydistribution of household debts for hot water, Lats 30
8%20- C
XL 10
Std. Dev=84.38 Mean= 67.2 0 N = 77.00 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 25.0 75.0 125.0 175.0 225.0 275.0 325.0 375.0 Householddebts, Lats
57 Chart 20 shows that a clear majority of households owes relatively small amounts of money for heat. Also Chart 21 shows that a significant majority of households owes rather small amounts of money for hot water. However, the debts of these majorities account only for small shares of total household debts for heat or hot water.
58 This conclusion can be drawn from Chart 22 below, which shows household debts for heat by quintiles as percentages of total household debts for heat. This conclusion can also be drawn from Chart 23, which shows household debts for hot water by quintiles as percentages of total household debts for hot water.
Chart23: household debts for hot water byquintiles as a percentageof total houshold debts for hot water
70.0R ; 60.0
40.0 40.0M E 30.0 20.0 10.0* lI | 6Lhlilel QnThle2QiWnOle3 QintIe4 Qinlile5
59 Chart 22 shows that quintiles I and 2, the bottom 40% of households indebted for heat, account for only about 10% of total household debts for heat, whereas the top 20% of debtors account for 56% of total household debts for heat. Also, Chart 23 shows that quintiles I and 2, the bottom 40% of households indebted for hot water, account for only about 7 % of total household debts for hot water whereas the top 20% of debtors account for 61% of total household debts for hot water. Quintiles in Charts 22 and 23 have been created based on ranking households in ascending order according to the amounts of their debts.
72 60 Further, an analysis of expenditure levels of households in the top quintiles of debtors for heat and hot water shows that these households are not predominantely poor (low expenditure level households). They are distributed rather evenly across all expenditure categories of households. Nevertheless, a number of households in the top quintiles of debtors for heat and hot water would be eligible for social assistance but, in fact, do not receive any.
61 In order to maximize effectiveness, a strategy of enforcing cost recovery from households owing for heat and hot water should primarily target the relatively small number of high ranking debtors whose debts account for large shares of total household debts for heat and hot water. However, to comply with the responsibility of providing the best possible social protection to poor households, those households targeted for measures of enforcement should be systematically screened for social assistance eligibility, specifically informed about the social assistance program and instructed how to apply. Under conditions carefully to be determined, retroactive program coverage may be considered. This measure would provide the utmost social protection and, at the same time, increase the likeliness of successfully collecting heat and hot water debts accumulated over longer periods of time.
Enforcement
62 However, relatively soft enforcement mechanisms such as fines or publishing the names of indebted households in the building entrance or the local newspaper seem not likely to work. Over 80% of indebted households (either heavily indebted or not) indicated that they would not pay if these mechanisms would be applied. Only more drastic measures such as disconnecting households from the telephone or electricity network, or disconnecting entire buildings from the heating and hot water network may have some effect: between 30% and 40% of households would pay their debts in response to these measures. The rate of households willing to pay their debts in reaction to these enforcement provisions increases if also the degree of indebtedness increases.
VI. ALLOWANCE PROGRAM FOR HOUSING AND UTILITY SERVICES TO LOW-INCOME HOUSEHOLDS
Overview
63 Riga City's allowance program for housing and utility services is the most important social assistance program for low-income households at the local level. The effectiveness of this program has to be strengthened. Several flaws have been identified. First the coverage of the program deficient. Second, there is leakage of resources to non-eligible households. Third, the application process should be simplified and made more customer-friendly. Fourth, operational and administrative practices of the allowance program should be improved. In particular, program rules and regulations should be reviewed and adjusted and applied more uniformly across city districts as well as under conditions of reasonably controlled flexibility of interpretation. Furthermore, program objectives have to be defined more clearly. Transformation of the allowance program into a general cash-based poverty benefit scheme may be considered. Also, additional computerization is needed as well as computerized communications among allowance offices. In addition, communications with other city agencies and central government departments should be computerized. Fifth, staffing should be increased and staff training is needed. Complementary to the Riga district heating project, assistance is being proposed to upgrade the effectiveness of the allowance program.
Allowance program for housing and utility services
64 Riga's allowance program for housing and utility services is the most important social assistance program at the local level besides a large number of other smaller programs such as the food benefit program, the medical services allowance, the water meters program and other smaller programs. In the first half of 1999, the allowance program for housing and utility services absorbed more than 60%
73 (1,680,135 Ls) of all city expenditures for social assistance (amounting to 2,794,342 Ls). This program is means-tested and tries to guarantee a food minimum of 24 Ls for households with a per capita income of 42 Ls or less (pensioners: 55 Ls or less, food minimum: 26 Ls) considering established social norms for calculating applicable charges for housing and utilities. A key component of the social assessment was the appraisal of Riga's allowance program for housing and utility services. The results of this appraisal are provided below.
Lack of programcoverage
65 The social assessment concluded that the effectiveness of the allowance program for housing and utility services in place should be strengthened. First, lack of program coverage should be tackled. According to results from the household survey, about 3% of residential district heating customers in Riga are beneficiaries of the allowance program, however, almost 11% would be eligible but do not currently receive program benefits. More than 50% of these households do not plan to apply to the program. Chart 24 below shows in greater detail the intentions of eligible households to apply to the housing allowance program or not.
Chart24: Intentions of householdsto apply Yes 27.8%
No, not eligible 31.5%
No,otherreasons 20.4%
Undecided 20.5%
66 The major obstacle that prevents people from applying appears to be the fact that they do not know the program (about 70% of eligible households). Also, people do not know where and how to apply (more than 80% of eligible households). Consequently, most of households (83%) eligible for the allowance program state that they do not have enough information about the program.
67 In order to provide appropriate social protection to low income households, Riga City should increase coverage of the allowance program. This objective can be achieved through improved information dissemination. Also better inter-agency cooperation, in particular, with municipal housing maintenance organizations may help increase program coverage. Improved cooperation with housing maintenance organizations is important because these organizations are a key agency for disseminating information about the allowance program due to regular contacts with a large number of households. Even at present, without an information dissemination strategy in effect, housing maintenance organizations are the second most important source of information for residential customers on the allowance program (see Chart 25 below).
74 Chcrt25: InformctionFeceived from
Relatives,friends HMOstaff 19.2% Tv | 18.3% Newspaper 15% Socialassistance staff 1117% Radio 5.8% Brochure,bulletin 1.7% Othersources 008%
68 Apparently, households would not feel stigmatized in case they would apply to the allowance program. This conclusion can be derived from the fact that 74% of eligible households disagree with the opinion that requesting social assistance from the state is humiliating. Also, declaring their incomes seem not to be a problem for eligible households. The survey shows that 91% of these households don't mind declaring their incomes or are indifferent regarding declaring or not declaring incomes.
69 On the other hand, 35% of eligible households believe that the amount of money that they would receive is so insignificant that it is not worth while to apply. Considering the scarce information households have about the allowance program, they may not know how much financial support they would receive if they would apply. This issue reveals that not only lack of information about the allowance program is a problem but also lack of correct information. Among survey households, there seems to be some concern regarding the perceived requirement of having to accept jobs that they may not like as a precondition for applying to the program. 35% of the respondents have this concern, while 28% don't.
Program leakage
70 The assessment further identified program leakage as an issue to be tackled in order to upgrade the effectiveness of the allowance program for housing and utility services in place. The analysis of data obtained from the survey showed that about one third of the allowance beneficiaries in fact are not eligible. This conclusion resulted from an assessment of income, expenditure and demographic data obtained from the household survey. Data from 120 beneficiary households was analyzed in detail on a case-by-case basis. Social assistance staff as well as interviewers who had carried out the survey work participated in the assessment. The interviewers were able to enrich the assessment based on additional information from visual evidence and conversations with the respondents.
71 A key provision to address program leakage is improved targeting of eligible households. The current practice of means-testing based on reported income should be strengthened by using suitable poverty correlates for processing applications. To improve targeting of eligible households, in-depth interviews and focus group discussions with social assistance staff should be carried out in order to develop guidelines for targeting the poor.
72 Currently, a number of social assistance employees appraise eligibility of applicants based on a valuable and extensive stock of experience, qualified insights in the nature of poverty and vulnerability, and well-developed assessment skills. However, the knowledge and capacity of these employees are largely implicit and intuitive. Thus, this knowledge and capacity should be systematically analyzed, made explicit and used for the development of targeting guidelines. To obtain best possible 75 results, also social workers, local poverty assessment experts and selected beneficiary households should participate in the above in-depth interviews and focus group discussions to develop targeting guidelines.
Applicationprocess
73 Factors related to the process for applying to the allowance program can also be improved. On the one hand, in the perception of allowance beneficiaries, the application process appears to be a rather fast and easy undertaking than an overly time-consumning and tiresome effort - 58% of allowance recipients think the process is fast and easy while 30% consider it to be a time-consuming and tiresome activity. Nevertheless, the following survey results help better appraise efforts required for applicants to obtain program assistance and allow to identify areas for improvement.
74 Program applicants had to visit their allowance offices several times (for details see Chart 26), spending altogether roughly 3.5 hours for these visits. In addition, applicants had to visit other offices (such as housing maintenance organization offices) in order to get all documents required for the application. What catches attention is that about 60% of applicants were not attended the same day when they visited their allowance offices and had to come back another day.
Chart 26: Numberof visitsto allowanceoffices
One 27.1%
Two 49.2%
Three 1 11%
Nbre thanthree E l12.7%
75 Charts 27 and 28 show how many offices people had to visit and how many visits altogether they had to make to get all documents required. On average, people spent a total of 4.1 hours for making these visits.
Chart27: Numberof all officesvisited
One 30.8%
Two 24.2%
Three 21.7% Four 15.8%
F_Keand rnore 5.8%
76 Chart28: Numberof alloffice visits
One 25% Two 25%
Three 15% Four 14.2% Fiveor more 20.8%
76 A majority of applicants (52%) believe that it takes too long until receiving an answer after having submitted the application, 34% disagree with this opinion, while 14% of applicants are indifferent. On average, applicantshad to wait two and a half months until receiving an answer. Chart UB9 shows further details on the time applicants had to wait for an answer.
Chart29: Months to wait foranswer
1 nonth 22.4%
2 n-rnths 28.5%
3 nunths 26.7%/
Nbrethan 3 nDnths 21.6%
77 A large number of program applicants complained about inconvenient office hours of both allowanceoffices (79%) and housing maintenanceorganization offices (88%).
78 Procedures for applying to the allowanceprogram should be simplified and made more customer-friendlyby reducingthe need to visit various offices several times and by minimizingthe time applicantshave to wait in line when they visit these offices. The time it takes until applicantsreceive an answer from the allowance offices after having submitted their application should be minimized. And schedulingof office hours should be more responsiveto the needs of applicants.
Satisfactionwith pro&ramand social assistancestaff
79 The allowanceprograms seems to alleviateefforts of low-incomehouseholds to survive- 98% of them would have applied also if the had known beforehand how much money they would get. However, at the same time, 85% of the respondents stress that they still do not have enough money for buying the minimumof food they need in their households.
80 In the opinion of applicants, allowanceprogram employees seem to be competent:about 70% of the respondents stated that employees were able to answer all questions asked. However, friendlinessof allowance program staff could be improved. Only one third of the respondentsconsider that officialsattending them were friendly, while almost all other respondents were undecidedregarding the question whetherallowance program staff was friendly or not.
77 Improving operational and administrative practices of the allowance program, transforming program ob.ectives
81 Operational and administrative practices of the allowance program should also be improved in order to upgrade program effectiveness. First, program rules and regulations across city districts should be applied more uniformly. Also, the degree of flexibility in the interpretation of rules and regulations should be reasonably controlled. Currently, application of rules and regulations across city districts varies; moreover, interpretation of eligibility rules and regulations may occasionally be too generous, though well-intended. In addition, program objectives have to be defined more clearly. Though originally conceived as a mechanism to help low-income households pay charges for housing and communal services, the allowance program has been used to a considerable extent as a general cash-based poverty benefit scheme. This transformation may be a move in the right direction. However, any changes in terms of program objectives have to be done explicitly and supported by an appropriate policy framework.
82 Second, software programs used for processing and administering applications should be standardized. At present, a variety of such programs are used across city districts. This complicates communication as well as comparison and aggregation of data at the city level. Furthermore, communications between different social assistance offices should be computerized in order to improve program operations and administration. To this end, a local area network should be established. Also, additional personal computers are needed. In addition, communication with other city agencies and central government departments (including tax authorities, housing maintenance organizations and providers of utility services) should be computerized. In particular, crosschecks with other social sector databases (pensions, family benefits) should be facilitated. Data exchange programs are required to facilitate computerized communications with agencies and departments at the local and central government level. Further computerization of program operations and administration, in particular, computerization of inter-office and interagency communications would simplify application procedures and made these procedures more customer-friendly (see section on application process above).
Reviewing rules and regulations ol' the allowance program
83 Systematic in-depth interviews and focus group discussions (linked to the above effort of developing targeting guidelines - see section on program leakage) should be carried out with staff of the allowance program, local social workers, poverty assessment experts and selected beneficiary households in order to review and adjust existing program rules and regulations. These rules and regulations should be reviewed and adjusted in order to ease operations, make the program more customer-friendly and eliminate mechanisms that may prevent eligible beneficiaries from applying to the social assistance program.
Staffing and training
84 Increased staffing is necessary in order to improve coverage of the allowance program. Staff training is needed to ensure uniform and high quality application of program rules and regulations everywhere in the city. Staff training is also needed in connection with actions to further computerize social assistance offices. Furthermore, training is necessary to improve targeting of eligible beneficiaries. To a considerable extent, this training should be based on the above targeting guidelines to be developed on the basis of in-depth interviews and focus group discussions with social assistance staff, social workers, poverty assessment experts and selected beneficiary households.
Action program
85 During project preparation, a dialogue has been initiated with the Department of Welfare of the Riga City Council to facilitate actions to strengthen the allowance program. Complementary to the
78 Riga district heating project, assistance is being proposed to upgrade the effectiveness of the allowance program. Activities will be coordinated with actions of the Bank's social protection team in order to develop compatible strategies in pursuit of a joint overall social assistance approach.
86 To the extent that privatization of apartments advances, the need to protect low-income households will increase because enforcement practices of Riga Siltums and private housing management agencies would be expected to be more strict than those of municipal housing maintenance organizations, at present. Improved coverage of the current allowance program will also allow municipal housing maintenance organizations to implement a more rigorous enforcement of payments for utility services from better-off households. More effective social assistance in conjunction with strengthened enforcement of payments for utility services from better-off households will, in addition, facilitate a more rational use of financial resources of the City. Funds currently used for covering utility debts of better-off households will decrease while the funds used for allowances to low-income households will increase.
VII. HOUSEHOLDBUDGETS AND CHARGESFOR HOUSINGAND UTILITIES
Overview
87 Household expenditure for district heating amounts, on average, to 32.8% of all household expenditures for housing and utility services, household expenditure for hot water amounts to 8% of all expenditures for housing and communal services. Expenditure for district heating is the largest of all expenditure items for housing and communal services. On average, all expenditures for housing and utilities as a share of total household expenditures amount to 22.12%. Households in lower expenditure quintiles spend more for housing and communal services than households in higher quintiles. On average, food expenditures as a share of total household expenditures amount to 38.45%. In absolute terms, lower-income households spend much less for food than higher-income households. In relative terms, higher-income households spend less of their total expenditures for food than lower-income households. On average, expenditures for housing and communal services as a share of non-food expenditures amount to 35.2%. Mean expenditures for housing and utilities as a percentage of mean expenditures for non-food goods and services are higher for households in lower expenditure quintiles than for households in higher quintiles. Households in the bottom quintiles use most of their expenditures for food, housing and utility services. Households in the top quintiles are able to use a large share of their expenditures for goods and services that are neither food items nor charges for housing and utilities.
Expendituresfor housing and utilities
88 On average, households spend for district heating 23.1 Lats or approximately 7% of their total expenditures (see Chart 3() and Chart 31 below). For hot water, they spend 6.1 Lats, on average, or about 2% of their total expenditures. Expenditure for district heating is the largest of all expenditure items for housing and communal services, followed by expenditures for transportation (11.3 Ls/3.4%), telephone (7.7 Ls/2.4%), housing (7.5Ls/2.3%) and hot water (see Chart 30).
79 Chart 30: Mean household expenditure per month for different services, Lats
25.0
20.0
15.0 ~
10.0 t m
0.0 'o ws eXeoS G>GX\eN4,MOwt>e \
Chart31: Mean household expenditures for housing and utilities as a percentageof total household expenditures
8 7 a SXXl
2 8 5~ _g 0 S $ X
80 89 Average household expenditure for district heating amounts to 32.8% of all household expenditures for housing and utility services. Average household expenditure for hot water amounts to 8% of all household expenditures for housing and communal services. Chart 32 below shows mean household expenditures for housing and different utility services as a percentage of total expenditures for these items.
Chart 32 - Mean household expenditures for housing and different utility services as a percentageof total expendituresfor these items Bectricfty6 Gas2.7 Cable1V1.5 Coal,etc.
Water&Sewerage 0.3 Heating 6.2
MF,cutility servicesA . 6.7
Hotw atere 8.4
Housing -Transport 10.3 Telephone 15.5 10.6
90 On average, all expenditures for housing and utilities as a share of total household expenditures amount to 22.12%. Households in lower expenditure quintiles spend more for housing and communal services than households in higher quintiles. For example, households in the bottom quintile spend 40.35% of their expenditures for housing and communal services, households in the top quintile spend only 14.1% of their expenditures for housing and comrnunal services. Chart 33 below shows, based on data for expenditure quintiles, the relationship between expenditure levels and expenditures for housing and utilities as a percentage of total household expenditures.
Chart33: mean householdexpenditures for housing and utilitiesaltogether as a percentageof totalhousehold expendituresby expenditurequintiles 45E 40*. i i
91 Lower-income households spend a much larger share of their expenditures for district heating and hot water than higher-income households. For example, households in the bottom expenditure quintile spend 15.9% of their expenditures for district heating and 3.2 % for hot water, 81 whereas households in the top quintile spend only 6.3 % of their expenditures for district heating and 1.8 % for hot water. Table 1 and Chart 34 below show the relationships between expenditure levels and expenditures for housing and utilities based on data for expenditure quintiles.
Table 1 - Mean householdexpenditures for housing and different utilities as a percentageof total household expendituresby expenditurequintiles MunicipalServices Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 1. Heating 15.9 9.9 8.8 6.3 3.7 2. Transport 3.5 4.2 2.9 3.7 3.2 3. Telephone 3.4 2.9 2.7 2.3 1.8 4. Housing 4.8 3.2 2.5 2.2 1.4 5. Hot water 3.2 3.1 2.2 1.8 1.0 6. Misc. utility services 2.5 2.2 2.0 1.5 0.8 7. Water & Sewerage 2.7 2.1 1.6 1.3 0.8 8. Electricity 2.5 1.7 1.6 1.3 0.8 9. Gas 1.5 1.2 0.7 0.5 0.3 10. Coal, etc. 0.0 0.0 0.1 0.1 0.1 11. CableTV 0.4 0.4 0.5 0.3 0.3
82 Chart 34- mean household expenditures for housing and different utilities as a percentage of total household expenditures by expenditure quintiles
0 80
C01010~~~~~~~~~~~~~1. 4v
Qirtile2 - 2 -p 1 °s° or Qintsile3 * # 40Stt we 81t?Q 4 6Llntile4 -, v ---- is s '% 0 6ujrtile5 i es Act/fj-~
Food, non-food, and total household expenditures
92 On average, food expenditures as a share of total household expenditures amount to 38.45%. In absolute terms, lower-income households spend much less for food than higher-income households. In relative terms, households in quintiles 1 - 3 spend, on average, similar amounts for food whereas households in quintile 4 spend slightly less, and households in expenditure quintile 5 considerably less of their total expenditures for food than quintiles 1 - 3. Chart 35 below shows mean monthly food and non-food household expenditures by expenditure quintiles, and Chart 36 shows mean monthly expenditures for food and non-food items as a percentage of total household expenditures by expenditure quintiles.
83 Chairt35 - Meanmonthly food andnon-food expendituresby quintiles,Lats 700
400
300 ! -_ 200
0 Quintile1 Ouintile2 Quintile3 Quintile4 Quintile5 mlfood expenditures U non-foodexpenditures
Chart36-Mean monthly food andnon-food expenditures as a percentageof total householdexpenditures by 1000% 100% ~~~~quintiles
70% - 60%
40% 20O30% X_
10%
Quintile1 Quintile2 Quintile3 Quintile4 Quintile5 9 food expendituresE nonfoodexpendiures| _~~~ I -- -_ -_ _d~r]
Linkagesamong expendituresfor food, non-food items, and housing and utilities
93 On average, expenditures for housing and communal services as a share of non-food expenditures amount to 35.2%. Mean expenditures for housing and utilities as a percentage of mean expenditures for non-food goods and services are higher for households in lower expenditure quintiles than for households in higher quintil[es (see Chart 37 below). For example, mean expenditure for housing and utilities as a percentage of mean expenditures for non-food amount to 69.21% in the bottom quintile, whereas mean expenditures for housing and utilities as a percentage of mean expenditures for non-food amount to only 21.9% in the top quintile.
84 Chart37 -Mean expenditures ior housingand utilities as a percentageof meanexpenditures for non-foodgoods andservices
70.00 60.00vv
40.00i} v C
10.00'.._s ,
Quintile1 Quintile2 Quintile3 Quintile4 Quintile5
94 Households in the bottom quintiles use most of their expenditures for food, housing, and utility services. The poorer the households are the less they have money left for goods and services other than food, housing, and utility related items. By contrast, households in the top quintiles are able to use a much larger share of their expenditures for goods and services that are neither food items nor expenditures for housing and utilities. The better off households are the more they have money left for goods and services other than food, housing, and utility related items. Households in the top quintiles have even more money for non-food expenditures other than housing and utilities because their food related expenditures as a share of their total household expenditures decrease considerably in comparison with households in lower expenditure quintiles as seen above, Chart 36. Charts 38.1 to 38.5, below, show, based on data for expenditure quintiles the relations between expenditure levels and expenditures for food, housing and utilities, and other non-food items.
Chart38.1- Expenditure quintile 1: Mean Chart38.2- Expenditure quintile 2: Mean householdexpenditures for food andnon- householdexpenditures for foodand non- foodas a percentageof total household foodas a percentageof total household expenditures expenditures
non-food 57% th non- food 26%
85 Chart 38.3 -Expenditure quintile 3: Mean Chart 38.4:Expenditure quintile 4: Mean household expenditures for food and non- household expenditures for food and non- food as a percentage of total lhousehold food as a percentage of total household expenditures expenditures
_ \ non-food\ l l l \ non-food
0 l% othernon food fo 3%
Chart 38.5 - Expenditure quinitile5: Mean household expenditures for food and non- food as a percentage of total household expenditures
-i___ utility
65% otihernoh- foodI 50% I
95 For very poor households, non-food expenditures tend to shrink to expenditures for housing and utilities only. In extreme cases, the poorest of the poor may have to reduce their expenditures for food in order to be able to pay charges for housing and utilities. Alternatively, they may fail to pay for housing and utilities and get indebted to house owners, utility companies or municipal housing maintenance organizations.
Income/expenditure inequality
96 Income/expenditure inequality for households in Riga is typical for transition countries. The Gini coefficient, which measures the extent of inequality in an income distribution, is roughly 33%. Chart 39 below shows the deviation from absolute income/expenditure equality for the Riga's population on district heating.
86 Chart 39: Lorenz Curve of Income Distribution
1 00% .9
90% Curveo
@ 80% absolute n 70% equliy 60% x 50% 0 & 40%0/-
30%2
IL 20%/^ ° Actual-(expenditure/inoejdistribution of 10%
0% 0% 20% 40% 60% 80% 100% Percentage of Population
VIII RECOMMENDATIONS
97 Lack of coverage. Lack of coverage of the allowance program for housing and utility services should be tackled through improved information dissemination to the public in general and possible beneficiaries in particular. Also, better inter-agency cooperation, specifically with municipal housing maintenance organizations may help increase program coverage.
98 Leaka2e. Leakage of the allowance program should be tackled through improved targeting of eligible households. To improve targeting of eligible households, in-depth interviews and focus group discussions with social assistance staff should be carried out in order to develop guidelines for targeting the poor. To obtain the best possible results, also social workers, local poverty assessment experts and selected beneficiary households should participate in the above in-depth interviews and focus group discussions to develop targeting guidelines.
99 Application process. Procedures for applying to the allowance program should be simplified and made more customer-friendly by reducing the need to visit various offices several times and by minimizing the time applicants have to wait in line when they visit these offices. The time it takes until applicants receive an answer from the allowance offices after having submitted their application should be minimized. And scheduling of office hours should be more responsive to the needs of applicants. Also, friendliness of allowance program staff could be improved.
100 Operational and administrative practices. To improve operational and administrative practices of the allowance program, the following actions should be taken: (i) program rules and regulations across city districts should be applied more uniformly; (ii) flexibility in the interpretation of rules and regulations should be reasonably controlled; (iii) software programs used for processing and administering applications should be standardized; (iv) communications between different social assistance offices should be computerized; to this end, a local area network has to be established, and additional personal computers are needed; (v) communication with other city agencies and central 87 government departments (including tax authorities, housing maintenance organizations and providers of utility services) should be computerized; to this end, data exchange programs are required.
101 Program obiectives. Objectives of the allowance program have to be reviewed, redefined or defined more clearly. This task has to be carried out based on an appropriate policy framework.
102 Rules and regulations of the allowance program. Systematic in-depth interviews and focus group discussions should be carried out with staff of the allowance program, local social workers, poverty assessment experts and selected beneficiary households in order to review and adjust rules and regulations of the allowance program. These rules and regulations should be reviewed and adjusted in order to ease operations, make the program more customer-friendly and eliminate mechanisms that may prevent eligible beneficiaries from applying to the allowance program.
103 Emereencv fund. An emergency fund should be established to address the restriction of many low-income households for applying to the allowance program because they are unable to pay accumulated debts for housing and communal services. This fund would primarily be supported by private sector agencies in Riga as well as international agencies.
104 Staffing and training. Increased staffing is necessary in order to improve coverage of the allowance program. Staff training is needed to ensure uniform and high quality application of program rules and regulations everywhere in the city. Staff training is also needed in connection with actions to further computerize social assistance offices. Furthermore, training is necessary to improve targeting of eligible beneficiaries.
105 Informationon heatine and hot water options. Riga City, in close coordinationwith Riga Siltums, should provide informnationand education to Riga's households regarding advantages and disadvantages of different heating options for different categories of residential customers. Also, Riga City and Riga Siltums should provide information and education to Riga's households regarding different hot water options for different categories of residential customers.
106 Cost recoverv. Riga city's housing maintenance organizations should implement a strategy of enforcing cost recovery from households owing for heat and hot water by specifically targeting the relatively small number of high ranking debtors whose debts account for large shares of total household debts for heat and hot water. To provide the best possible social protection to poor households, those households targeted for measures of enforcement should be systematically screened for social assistance eligibility, specifically informed about the allowance program for housing and utilities and instructed how to apply. Under conditions carefully to be determined, retroactive program coverage may be considered.
88 Annex 10: Statement of Loans and Credits
Status of Bank Group Operations in Latvia IBRD Loans and IDA Credits in the Operations Portfolio (as of May 31, 2000)
Original Amount in US$ Millions Last PSR Fiscal Supervision Rating a/ Project ID Year Borrower Purpose IBRD IDA Cancel. Undisb. IDev Obj Imp
Number of Closed Projects: 8
Active Projects: 9 LV-PE-8526 1995 REPUBLIC OF LATVIA JELGAVA DISTRICT HEAT 14. 00 0. 00 0. 00 0 .20 S S LV-PE-34584 1996 REPUBLIC OF LATVIA MUN. SERVICES DEV. 27.30 0.00 0.00 6.08 S S LV-PE-35807 1997 REPUBLIC OF LATVIA WELFARE REFORM 18.10 0.00 0.00 7.97 S S LV-PE-8532 1997 REPUBLIC OF LATVIA HIGHWAY 20.00 0.00 0.00 2.41 S S LV-PE-40553 1998 REPUBLIC OF LATVIA SOLID WASTE MGMT. 7.95 0.00 0.00 7.91 S S LV-PE-58520 1999 GOVT. OF LATVIA HEALTH 12.00 0. 00 0.00 9.70 S S LV-PE-55585 1999 MINISTRY OF FINANCE STATE REVENUE SERVICE 5.00 0.00 0.00 3.89 S S LV-PE-49172 1999 GOVT. OF LATVIA EDUCATION IMPROVEMENT 31.10 0.00 0.00 25.75 S S LV-PE-44804 1999 REPUBLIC OF LATVIA RURAL DEVELOPMENT 10.50 0.00 0.00 5.02 s s
U = unsatisfactory, a/ Following the FY94 Annual Review of Portfolio performance (ARPP), a letter-based system was introduced (MS = highly Satisfactory, S = satisfactory, HU = highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.
89 Latvia at a glance 9/22/99
Eurooe & Lower- POVERTY and SOCIAL Central middle- Latvia Asia income Development diamond' 1998 Pooulation. mid-vear (millions) 2.4 473 908 Life expectancy GNP oercaoita tAtlas method.USS) 2420 2.190 1.710 GNP (Atlas methxod.USS oPtions) 5 9 t.039 1,557
Averaoe annual arowth. 1992-98
PoouJlat,on %) -1.3 01 1.1 Laborforce I%) -1.3 06 15 p G Gross per ~ H pnmary Most recent estimate (latest vear available. 1992-98) capita .nrollmrnt Povertv (% of ooulation below nationaloovertv line)l . . Urban ooDulation /% of total ooDulation) 74 68 58 Life exoectancv st birth (vears) 69 69 68 Intantrnortalitv oer.000 ivebirthsl 15 23 38 Child malnutrition (% of children under 5. Access to safe water Access to safe water (% of poDulationJ .. 75 Illiteracv (% ofoooulationaoe 15+) 0 4 14 Grossorimarverroliment `%ofschool-aoeoo00ulationi 96 100 103 Latvia Male 98 101 105 Lower-middile-incomegroup Female 93 99 100 KEY ECONOMICRATIOS and LONG-TERMTRENDS 1977 1987 1997 1998 Economicratios' GOP (US$ billions) 8.6 5 6 6,4 Gross domesticinvestment/GOP 34.7 22 8 23 0 Trade Exoortsof ooodsand services/GDP 51 0 47.7 Grossdomest savirnos/GDP 34.9 14 3 9.8 Gross nationalsavinos/GDP 16 6 11,9 Currentaccount balance/GDP -6 1 -11.1 Domestic Interest oavmentslGDP 0,4 0.3 Savings Investment Total debt/GOp 20,0 24.7 Total debt service/exDorts 7.0 3.8 Presentvalue of debt/GDP 8 5 6.4 Presentvalueof debt/exoorts 15.9 12 5 Indebtedness 1977-87 1988-98 1997 1998 1999-03 (averaoeannual orowth) GDP 3 6 -64 8.6 3.6 5.0 Latvia GNP oer caoita 3 0 *5.3 10.2 4,5 6.1 Lower-middle-incomegroup Exoortsof ooods and services 0.6 13.1 6.6 7.2
STRUCTUREof the ECONOMY 1977 1987 1997 1998 Growthrates of outputand lnvestment(%) t% of GDP) Aariculture 18.0 5.8 4.7 T Industrv 46.0 32.2 29.4 20 T Manufacturina 401 22.2 20.2 0
Services 35:9 62.0 65.9 2 0 9 96 97 98 Private consumDtion 55.3 69.4 72.7 40 Generalaovernment consumotion 9.8 16.3 17.6 |GDI - -GDP Imoortsof aoodsand services 59.5 61.0
1977-87 1988-98 1997 1998 Growthrates of exportsand imports(%) lavenaoe annual onowth) Aariculture 3.7 -8.9 3.7 -4 47 I Industrv 3.5 -13.1 11.7 3,9 20 Manufacturina 3.6 -11.9 17.1 3.4 a - Services 3.2 -0.5 7.5 4.7 20 94 95 96 97 98 Pnvate consumotion 2.0 -6.1 -4.8 5.8 Generalaovernment consumotion 5.4 2.2 0.3 5.3 Gross domesticinvestment -5.7 20.7 11.1 -60 lmoortsofooodsandservices 1.2 6.8 16.9 - Exports - Imporlts Gross nationaloroduct 3.6 -6.3 9.0 3.5
Note: 1998 data are preliminaryestimates. ' The diamondsshow four kev indicators in the ccuntrv (in bold) comoaredwith its income-oroucaveraae. It data are missinrathe diamond will be incomolete. Latvia
PRICESand GOVERNMENTFINANCE 1977 1987 1997 1998 Inflaton(%) Domesticprices120T (% change) 1.200T Consumerprices .. .. 8.4 4.9 s Implicit GDPdeflator -0.3 -0.8 6.6 11.2 B0004
Governmentfinance 3 \_ (% of GOP,includes current grants) o _ Current revenue .. .. 40.6 41.5 93 94 95 96 97 98 Current budget balance . .. 1.8 3.0 - GDPdeflator -C CPl Overall surplus/detici - 1.7 0.1
TRADE
(US$ millions) 1977 1987 1997 1998 Exportand import levels (USS millions) Total exports (fob) 1,838 2.011 4,000 n.a. n.a. 3.000 Manufactures 1,548 1,627 Total imports (cit) 2,686 3,141 2,000 Food 273 301 1O000 Fueland energy 145 116 a l F Capital goods 476 609 ExDortDrice index (1995=g100) 102 100 9 ImoortDrice index (1995=100) 109 111 [ *Expots °Imports Terms oftrade (1995=100) 93 90
BALANCE of PAYMENTS
(US$ millionsl 1977 1987 1997 1998 Currentaccount balance to GDPratio (%) Exports ot goods and services 2,871 3,051 4- Imports of goods and services 3,348 3,902 Resource balance -477 -851 o X 1
Net income 55 54 Net current transfers 77 84 -4
Current account balance -345 -713 -B
Financing items (net) 447 775 Changes in net reserves -102 -63 2
Memo: Reserves includino aold (USS millions) 953 1.012 Conversion rate (DEC. local/US$i .. 0.01 0.6 0.6
EXTERNAL DEBT and RESOURCE FLOWS 1977 1987 1997 1998 (US$ millions) Compositionof total debt 1998(USS millions) Total debt outstanding and disbursed 1,130 1,577 IBRD 120 186 IDA 0 0 A 156
Total debt service 133 62 64 IBRD 5 12 G. 604 IDA 0 0
Composition of net resource flows _ 5 3 7 Official grants 4 1 _ t Official creditors 63 Private creditors 12 Foreign direct investment 335 216 F :637 Portfolio equity 9 41 E: 50
World Bank program Commitments 98 30 A - IBRD E - Bilatera Disbursements 53 82 B- IDA 0 - Other multilateral F - Pnvate Principal repayments 0 4 C - IMF G - Short-term Net flows 53 78 Interest payments 5 8 Net transfers 48 70
Development Economics 9/22199
MAP SECTION s~~k/ 'JrA'~~' ,tAftREAts ~ LATVIA RIGADISTRICT HEATING ~rREHABILITATIONPROJECT
PROJECT:
DJSTRICTHEATING TRANSMISSION PIPELINESTO BECONSTRUCTED
KILOMETERS~~ ~ ~ ~~~~~~~EELMNAE